SUSTAINABILITY REPORT ANNUAL REPORT AND

2014

“Overall, KONGSBERG had a good year in 2014, with good earnings and cash flows, growth in revenues, and record-high orders” 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

CONTENT – ANNUAL REPORT AND SUSTAINABILITY REPORT 2014

Cover Key figures 2014 8 Directors’ Report and 86 Corporate Governance 104 Sustainability Report Financial Statements 87 The Board’s Report on 104 Content 1 Introduction 9 Short summary Business Corporate Governance 106 Introduction 2 Extreme Areas 88 Policy – Kongsberg Gruppen 118 Sustainable innovation performance for 10 Directors’ Report 2014 89 Articles of Association 123 What have we achieved? extreme conditions 25 Financial statements, – Kongsberg Gruppen 131 Systems of governance 4 President and CEO contents 90 The Board’s Report on The and key figures Walter Qvam 26 Consolidated financial Norwegian Code of Practice 6 This is KONGSBERG statements 149 Financial calendar and 73 Financial statements 100 Shareholder’s information contact information – Kongsberg Gruppen ASA 101 Shares and shareholders 83 Statement from the Board of Directors 84 Auditor’s Report

KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

KEY FIGURES 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005

Sales

Revenues 16 613 16 323 15 652 15 128 15 497 13 816 11 056 8 306 6 720 5 791 New orders 22 097 15 043 14 605 15 016 13 584 17 605 14 635 14 338 7 672 5 683 Order backlog 21 020 15 687 16 523 17 839 17 759 19 892 16 692 12 646 6 472 5 416 Book-to-Bill Ratio 1.3 0.9 0.9 1.0 0.9 1.4 1.5 1.5 1 0.9

Performance

Earnings before interest, taxes, depreciation and amortisation (EBITDA) 2 060 2 142 2 294 2 385 2 485 1 619 1 319 1 560 627 536 Earnings before interest, taxes and amortisation (EBITA) 1 718 1 797 1 971 2 123 2 216 1 376 1 122 796 464 378 Earnings before interest and taxes (EBIT) 1 258 1 659 1 840 2 026 2 113 1 263 1 038 1 346 448 371 Earnings before taxes (EBT) 1 285 1 644 1 809 1 991 2 097 1 169 861 685 390 314 Profit for the year 880 1 225 1 304 1 418 1 500 828 587 490 252 262

Profitability

EBITDA % 12.4 13.1 14.7 15.8 16.0 11.7 11.9 18.8 9.3 9.3 EBITA % 10.3 11.0 12.6 14.0 14.3 10.0 10.1 9.6 6.9 6.5 EBIT % 7.6 10.2 11.8 13.4 13.6 9.1 9.4 16.2 6.7 6.4

Balance sheet

Equity 6 282 6 657 6 274 5 484 4 881 3 726 1 894 2 758 1 684 1 505 Equity ratio % 31 38 39 35 35 30 15 30 23 23 Net interest-bearing debt (3 551) (1 935) (1 198) (2 191) (1 813) (634) 1 439 (242) 294 282 Working capital 3 274 3 319 3 528 2 250 1 957 1 183 (217) 1 425 1 249 1 325

Employees

Number of employees, total 7 726 7 493 7 259 6 681 5 681 5 423 5 243 4 205 3 560 Number of recordable injuries per million hours (TRI) 4.7 3.7 1.5 1.7 6.3 5.5 3.5 Injury severity rate (number of days lost per one million man hours worked) (ISR) 45.3 15.6 13.6 1.1 22.3 58.2 5.6

The environment

Energy consumption (GWh) 123.7 127.0 114.7 108.9 103.2 100.0 74.4

CO2 emissions (metric tonnes) 26 006 25 294 19 579 22 747 20 005 12 980 7 801 Waste (metric tonnes) 1 788 1 935 1 784 1 622 1 772 1 473 1 256 Water (m3) 176 743 115 968

Owners’ value

Market capitalisation 14 760 15 300 14 940 13 920 15 960 10 590 9 840 10 170 5 250 3 720 Earnings per share after tax (EPS) in NOK 7.28 10.24 10.91 11.83 12.46 6.83 4.86 4.04 2.08 1.80 P/E in NOK 16.77 12.49 11.46 9.82 10.64 12.92 16.87 20.96 21.08 17.24 Dividend per share in NOK 9.25 5.25 3.75 3.75 3.75 2.00 1.38 1.25 0.63 0.54

KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Kongsberg Other MNOK 3,949 Protech Systems 0.3% MNOK 3,542 9.4 %

Kongsberg MNOK 4,020 Revenues Øvrig Defence Systems KPS MNOK 4,123 MNOK 16,613 25.8% Øvrig KDS MNOK 409 MNOK 110 KPS Kongsberg KOGT MNOK 170 KDS Oil & Gas Technologies KM KOGT 6.1% KM

EBITDA EBIT Profit for the year MNOK 2,060 MNOK 1,258 MNOK 880

Distribution of EBIT

Kongsberg Maritime Kongsberg MNOK 1,221 Kongsberg Defence Øvrig Protech Systems KOGT System MNOK 414 KPS MNOK 170 KDS KM Other Kongsberg MNOK -62 Oil & Gas Technologies MNOK -485

Number of employees

Rest of Europe Asia North America Central and Australia Norway 622 1,396 773 South America 17 4,770 and Antarctica 134

Earnings per share after tax Dividend per share Market capitalisation NOK 7.28 NOK 9.25 MNOK 14,760

KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

KONGSBERG GRUPPEN

Kongsberg Gruppen (KONGSBERG) is an international technology corporation that delivers advanced and reliable solutions that improve safety, security and performance in complex operations and during extreme conditions. KONGSBERG works with demanding customers in the global defence, maritime, oil and gas and aerospace industries.

Revenues EBITDA

16.0% 15.8% 14.7% 11.9% 13.1% 12.4% 11.6% 11.7% 9.3% 9.3%

MNOK MNOK MNOK MNOK MNOK MNOK MNOK MNOK MNOK MNOK 5,791 6,720 8,306 11,056 13,816 15,497 15,128 15,652 16,323 16,613

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

KONGSBERG GRUPPEN

Kongsberg Maritime Kongsberg Defence Systems Kongsberg Protech Systems Kongsberg Oil & Gas Technologies • Offshore • Missile Systems • Merchant Marine • Naval Systems • Subsea • Integrated Defence Systems • Emerging Business • Aerostructures • Defence Communications • Space & Surveillance 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

EXTREME PERFORMANCE FOR EXTREME CONDITIONS

KONGSBERG develops and delivers advanced systems and technologies for extreme conditions. Our solutions ensure efficiency, safety and high performance in operations ranging from deep sea to outer space. KONGSBERG’s objective is to secure and increase the stakeholders’ values through a profitable and growth oriented industrial development in a long-term and international perspective.

Vision

WORLD CLASS – through people, technology and dedication

We have a strong, value based culture that drives our business performance. Our corporate vision reminds us where we are heading, our horizon and the point we always aim for in our work.

Ambitions

KONGSBERG shall be a leading technology industrial • Group ambition is an annual average growth of group with World Class positions, driving a proactive 10 per cent over a five year period, of which about half growth agenda. We aspire to achieve a sustainable is organic development with a good balance between financial • We shall be a “double digit” EBITA-margin business performance, value creation and social and environmental • Through accelerated efforts to increase shareholder responsibility. return and improve competitiveness, we have the KONGSBERG shall develop value adding solutions ambition to achieve annual cost improvements by 2016 for our customers in key technology intensive industries. of NOK 1 billion We shall develop superior expertise to deliver leading • KONGSBERG will target a return on capital employed systems, products and services in our international matching historic levels – new projects and initiatives market segments. It is of importance that the strategic will be evaluated against a 10–15 per cent requirement and business related decisions made by the group are dependent upon project risk based on a sustainable perspective.

2 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Our values

Determined Innovative (intent, resolute, good-oriented) (unconventional, pioneering)

We are known for our drive and persistence. Always performing better is a vital part of We always strive to meet our customers’ expectations. who we are. We constantly innovate We set ambitious goals for ourselves and and implement improvements in all parts of our business we are driven towards them with a clear and – from our products, through our processes, constant focus. to our customers’ experiences.

What we start, we finish. We relentlessly pursue improvements, We do not give in. new ideas and new solutions.

DETERMINED INNOVATIVE

COLLABORATIVE RELIABLE

Collaborative Reliable (cooperative, network-oriented) (dependable, trustworthy)

Collaboration is fundamental to our business. Our customers and partners can trust We exchange ideas among ourselves, KONGSBERG to deliver, always. with our suppliers and partners, and we cooperate Dealing with KONGSBERG means dealing with closely with our customers. We work as teams, reliable people, a reliable corporation and reliable we share knowledge and we value team success products. KONGSBERG is a responsible – to the benefit of our customers and organization characterized by integrity and concern our own competitiveness. for health, safety and the environment.

We collaborate as individuals We are reliable people. and as an organization. We are responsible citizens.

KONGSBERG • Annual Report and Sustainability Report 2014 3 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

PRESIDENT AND CEO WALTER QVAM

Dear fellow shareholders! 2014 marked yet another important chapter in the technology company KONGSBERG’s history. The anniversary year was a year to honour and recognise the journey of one of the world’s oldest technology companies; but beyond that, it was a year for looking ahead at the opportunities the future holds. As the anniversary year came to an end, we embarked on the next 200 years of KONGSBERG’s history. We can look back on a year where we celebrated our history, our partners and our customers, and delivered yet another year of good results.

2014 was a year of continued positive development for the Group. The expertise, technologies and products we possess have seen high demand in their respective market segments. KONGSBERG’s maritime activities continued the growth they’ve had in recent years. In 2014, customers continued to choose us for their new projects and operations in both Norway and internationally within all our maritime areas – subsea, offshore and the merchant fleet. Statoil chose us for its pre-FEED study on the Johan Sverdrup field, Petrobras chose KONGSBERG technology for several new pipe-laying vessels, our “Full Picture” solution was chosen for 17 new United Arab Shipping Company container vessels that are being constructed at Hyundai Heavy Industries, and AXA Engehnaria Submarina and Deep Ocean, Fugro and DOF are just a small selection of the key players that chose our autonomous underwater vehicles for their respective operations, to mention a few examples. We experience that the KONGSBERG brand has a strong position in the market, which is also reflected in the increasing service and aftermarket for our maritime portfolio. The aftermarket share grew in 2014 in parallel with the rest of the business area, and accounts for about one-third of the maritime business area’s total revenues. In 2014, we also saw an increased turbulence in the security situation in several locations in the world, and the defence budgets in many countries are now increasing again. For our part, we saw clearly increasing demand for our modern core products in many countries. The record-­ breaking contract for the air defence system NASAMS in January, a number of contracts for deliveries to F-35, the The fact that the world is changing is news to no one, nor Phase III contract for development of the Joint Strike that the pace of change is increasing. We are a technology Missile (JSM) and the billion-kroner contract for coastal company with relatively few resources tied up in large, artillery for Poland are just some of the highlights that made costly production lines and production facilities. Our most 2014 a year of considerable growth in the Group’s defence important resource is the knowledge and skills of our segments. employees, in combination with the cooperation within The potential in several of our defence technologies is our “ecosystem” of suppliers and partners. This makes us undisputed. The Naval Strike Missile (NSM) has been met flexible, adaptable and energetic. We have a competitive with significant interest throughout the year, in part from advantage in times where surroundings and trends are the US Navy through the implementation of a successful changing more rapidly making the planning horizon shorter firing test on board one of the navy’s Littoral Combat Ship and the competition more intensive. When we see market vessels. JSM is in its final phase and, in addition to being potential for our existing technology, or areas where our the only missile of its type that fits in the bomb bay on the expertise can be applied, we can quickly innovate world- F-35, it has also been fit-checked for other aircraft types class solutions. such as the F-18. JSM confirmed its position as the most

4 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

advanced missile for deployment on the F-35 yet again in a focus on costs to ensure that we remain competitive in February 2015, when Australia announced their cooperation the face of increasingly tough international competition. with Norway on the further development of the missile. We implemented yet another initiative in 2014 that will NASAMS is being further developed continuously, and is the also strengthen our long-term competitiveness. “Innovate world’s leading air defence system in its segment. The list is with KONGSBERG” is a Group initiative that accelerates long, and illustrates how well-adapted and positioned and strengthens innovation and product development for KONGSBERG’s modern defence portfolio is in the market. the Group as a whole. The initiative places a particular focus Considerable work was carried out in deliveries, product on the potential across and beyond the business areas’ development and marketing throughout 2014 for our existing core areas. This entails that we increase our efforts remote weapons stations. KONGSBERG is the world’s to identify opportunities in the synergies between the undisputed leading supplier of remote weapons stations, business areas’ different expertise and technology in new and the most recent addition to the portfolio, the Medium applications and products, and how we can do an even Caliber RWS (Remote Weapon Stations), has been received better job of exploiting the expertise and capacity in the with great interest in the market, and is a product that ecosystem beyond ourselves. represents a significant market potential. We look forward To continue KONGSBERG’s positive development, we to continued growth in our position in the segment for need to make sure that we continue to have the best remote weapons stations and the opportunities that lie minds, the newly educated, the established talents and the ahead, both in the short and longer term. experienced professionals. This is an important long-term 2014 was a turbulent and challenging year within the oil effort, and it is something in which we invest considerable and gas segment. In the first quarter, parts of the Polarled resources. To provide a concrete example, we received contract with Statoil was cancelled, and after the summer, nearly 2,000 applications for this year’s 150 summer jobs in we witnessed, together with the rest of the industry, how the Group. Everything from first-year to last year-students these uncertain times with a rapidly declining oil price have have applied to work for us during the summer of 2015. led to drastic cuts in the oil and gas companies’ invest- This is a solid increase from last year’s 1,350 applications. ments. For our part, this posed challenges for our solutions We are both proud and pleased that technologists of the and services within advanced software for the oil industry. future view KONGSBERG as a challenging, innovative and These developments caused us to carry out adaptations exciting technology company with great opportunities. and adjustments throughout the year, and this will also The celebration of a 200-year-old that is more energetic continue in 2015. However, despite the challenges, we are than ever has helped strengthen KONGSBERG both finding that the portfolio within oil and gas is well-positioned internally and externally, and provided a solid foundation for to help solve the challenges the industry is facing with further development. I want to take this opportunity to regard to increasing efficiency and cost cuts. We will thank all our employees for the passion they show in making therefore continue to work towards giving our software-­ us better every single day, our customers for the trust they based decision support systems and subsea solutions a place in us as we join forces to solve some of the most strengthened foothold within their segments over the long challenging and exciting tasks we face together, our term. partners and suppliers for excellent cooperation, and our One of the areas that saw strong growth is our portfolio owners and other stakeholders for their collaboration and for space and surveillance technology. We are participating support. in a number of important space projects; for example were the control mechanisms for the solar cell panels on the historic comet landing of space probe “Rosetta” delivered by KONGSBERG. The unique geographical positions of our data download stations, e.g. on Svalbard and the South Walter Qvam Pole, is another example of our position within space tech- President and CEO nology. We will continue to position ourselves to win more March 2015 market share in the commercial satellite segment, and continue to promote our industrial content within the Ariane programme. Both exploration and use of space is increasing, and KONGSBERG is well-positioned for the opportunities of today and tomorrow. In the autumn of 2013, we implemented a Group-wide efficiency program DeltaOne, which aims to improve the efficiency of KONGSBERG’s operations by NOK 1 billion a year by the end of 2016. This work is off to a good start, and in 2014 we can already see how programs for sourcing, project management, technology sharing and other areas are yielding results. DeltaOne is continuing in full force in 2015 and 2016. The program increases the awareness of each employee regarding the importance of efficiency and

KONGSBERG • Annual Report and Sustainability Report 2014 5 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

THIS IS KONGSBERG

KONGSBERG is an international, knowledge-based group that delivers high-technology systems and solutions to customers in the oil and gas industry, the merchant marine, defence and aerospace.

KONGSBERG’s solutions and deliveries contribute to safer, Financial value added more efficient operations at sea, on land and in outer space. KONGSBERG creates value in the areas and countries in Whether we are talking about defence, the merchant which we operate. First, we create value for our customers marine, the exploitation of oil and gas resources or fisheries through our products. Then we create value through the resources, our products are of strategic importance in payment of dividends to owners and wages to employees, Norway and internationally. We also supply technological and indirectly by buying goods and services from suppliers. solutions for global challenges such as environmental Value is also created through the importance we attach to monitoring and resource management. research and development. See page 140 for a table about the financial value added. Organisation The Group is divided into four business areas and a cor­po­ Corporate social responsibility rate services centre. The four business areas are Kongsberg Corporate social responsibility is important to KONGSBERG. Maritime, Kongsberg Oil & Gas Technologies, Kongsberg It is part of routine operations and the Group’s business Defence Systems and Kongsberg Protech Systems. strategy. The Corporate Centre provides staff and support func- KONGSBERG’s international operations are significant. tions to the business areas. The corporate staff has exper- At the beginning of 2015, 38 per cent of our employees tise in financial affairs, business development, investor worked outside of Norway, and 77 per cent of the Group’s relations, corporate law, corporate social responsibility, sales took place outside the country’s borders. This makes communication and HR. us an important player in many local communities the world over. That implies an obligation. Companies that engage in Ownership structure international activities have a special duty to ensure respon- Kongsberg Gruppen ASA is listed on the Oslo Stock Ex- sible operation. change and is subject to Norwegian securities legislation We live in an era in which climate change, shortages of and stock exchange regulations. The Norwegian state owns clean water and poverty are formidable global challenges. 50.001 per cent of the shares in the company. In addition, several countries are experiencing debt crises and instability. These challenges also affect KONGSBERG’s activities, directly or indirectly.

Revenues i MNOK Revenues in MNOK 9,703 4,276

2012 2013 2014 2012 2013 2014

Kongsberg Maritime Kongsberg Defence Systems • Delivers positioning, surveillance, navigation and automation • Norway’s premier supplier of defence and aerospace-related systems for merchant vessels and the offshore industry. systems. The portfolio comprises products and systems for • Is a market leader in dynamic positioning, automation and command and control, weapons guidance and surveillance, surveillance systems, process automation, fisheries, communications solutions and missiles. satellite navigation and hydroacoustics, as well as • Has expertise and production equipment to make advanced back-deck handling equipment for use on offshore vessels. composite and engineering products for the aircraft, offshore and helicopter markets.

6 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Svalbard

Norway Finland Sweden Russia Canada UK Denmark Poland Ireland Germany The Netherlands Hungary USA France Spain Italy Greece South Korea Kuwait China Algeria UAE Mexico Saudi Arabia India

Nigeria Malaysia Singapore

Brazil

Australia

Antarctica

Revenues in MNOK Revenues in MNOK 1,566 1,017

2012 2013 2014 2012 2013 2014

Kongsberg Protech Systems Kongsberg Oil & Gas Technologies • World’s leading suppliers of remotely controlled weapons • Delivers innovative solutions for oil and gas operations, control systems. including drilling, production and subsea development • Main products are the PROTECTOR Remote Weapon projects. Station weapons control system. The system enhances • Integrates software and services with physical products safety and security for personnel in military vehicles. for improving oil production, efficiency, and health, safety KONGSBERG is the world leader in this market and the environment

KONGSBERG • Annual Report and Sustainability Report 2014 7 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information FINANCIAL STATEMENTS DIRECTORS’ REPORT AND

“2014 was an eventful year for KONGSBERG”

8 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

SHORT SUMMARY BUSINESS AREAS

KONGSBERG KONGSBERG KONGSBERG KONGSBERG OIL & GAS MARITIME DEFENCE SYSTEMS PROTECH SYSTEMS TECHNOLOGIES

Revenues MNOK 9,703 MNOK 4,276 MNOK 1,566 MNOK 1,017

+17 % from 2013 -6% from 2013 -35% from 2013 -6% from 2013

EBITDA MNOK 1,441 MNOK 530 MNOK 254 MNOK -99

+22% from 2013 +2% from 2013 -39% from 2013 -302% from 2013

EBITDA margin 14.9% 12.4% 16.2% -9.7%

+4% from 2013 +9% from 2013 -6% from 2013 -315% from 2013

Priorities • Additional efficiency • Ensure continued • Continue the work on • Better earnings in a in 2015 and productivity improve- satisfactory completion securing the first contact challenging market ments throughout the of the large, ongoing on the MCRWS – position • Strengthen the position value chain programs in missiles, air KPS for new known for the business area’s • Continue the efforts defence systems and possibilities for MCRWS software solutions and on aftermarket activities other delivery projects. • Continue to focus on niche products within and service portfolio • Secure good progress costs – introduce further the oil and gas market • Secure and take new in developing JSM and adaptations to a lower • Continue developing the “2014 was an eventful year market positions, within pursue the possibilities volume for KPS while product range against all main segments that become available also preparing the the subsea and software • Continue developing with the teaming agree- organisation for potential markets for KONGSBERG” cost-efficient product ment with Raytheon rapid growth with MCRW • Growth outside our own and system solutions • Maintain a high market • Secure existing and domestic market • Expand the scope of activity related to the establish new positions supply in general and entire product range in the RWS market engineering services in • Additional strengthening particular of strategic foundation in key markets

KONGSBERG • Annual Report and Sustainability Report 2014 9 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

DIRECTORS’ REPORT 2014

Overall, KONGSBERG had a good year in 2014, with good earnings and cash flows, growth in revenues, and record-high orders on both the defence side and in Kongsberg Maritime (KM). KM and Kongsberg Defence Systems (KDS), which constitute about 84 per cent of the Group’s sales, had a good year, while Kongsberg Protech Systems (KPS) and Kongsberg Oil & Gas Technologies (KOGT) had unsatisfactory underlying earnings. Total revenues for the Kongsberg Group in 2014 amounted to MNOK 16,613, an increase of 1.8 per cent compared to 2013. A large share of this growth can be attributed to KM, which increased its revenues by 17.4 per cent. While development in KDS has been relatively flat in recent years, it saw a sharp upswing in order inflow in 2014, which will provide a solid foundation going forward. KPS had reduced revenues in 2014, but built its order backlog. KOGT also had a challenging year, characterised in part by the decline in the oil and gas market.

EBITDA for the Group in 2014 amounted to MNOK 2,060, Important events in 2014 compared to MNOK 2,142 in 2013. The Board decided to write-down goodwill in KOGT by MNOK 300 at the end of 2014 was an eventful year for KONGSBERG. The defence 2014. Profit for the year after tax amounted to MNOK 880 market became stronger throughout the year and (MNOK 1,225), corresponding to NOK 7.28 per share KONGSBERG’s position in the market is more visible than (NOK 10.24). On this basis, the Board of Directors will before, both as a result of new, major international contracts propose an ordinary dividend for the 2014 accounting year and collaboration agreements, but also as a result of the of NOK 4.25/share (4.25) and an extraordinary dividend of generally increased focus towards some of KONGSBERG’s NOK 5.00/share (1.00) – a total of NOK 9.25/share (5.25). product portfolios. The market within offshore, oil and gas In determining the extraordinary dividend, the Board took is more difficult, mainly due to the significantly reduced oil a basis in KONGSBERG’s strong equity and liquidity at the price in the second half of 2014. This development led to end of 2014 and the need to support the company’s growth challenges in KOGT. Despite the challenging offshore strategy going forward. Ordinary dividend and total market, KM experienced a record influx of orders in 2014. dividends constitute 58.4 per cent and 127.1 per cent, KM also has considerable activity vis-à-vis the merchant respectively, of the ordinary annual profit. marine market. This market developed in a positive direction in 2014. KM’s subsea market is also going strong. In February, the Norwegian National Authority for Investigation and Prosecution of Economic and Environ- mental Crime (Økokrim) took charges out against Kongs- berg Gruppen ASA, Kongsberg Defence & Aerospace AS

Revenues Earnings per share MNOK NOK

20 000 15 KONGSBERG KONGSBERG

12 OSEBX OSEBX 15 000 9 OSE OSE 10 000 6 5 000 3

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

10 KONGSBERG • Annual Report and Sustainability Report 2014

1. kv 2. kv.3. kv.4. kv. 1. kv 2. kv.3. kv.4. kv.

Historisk utvikling i driftsinntekter og EBITDA Historisk utvikling i driftsinntekter og EBITDA NOK millioner NOK millioner

20 000 20 000 20 20

15 000 15 000 15 15

10 000 10 000 10 10

5 000 5 000 5 5

0 0 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Drif EBITtsinntekterA % Norge Drif EBITtsinntekterA % Norge Driftsinntekter utenfor Norge Driftsinntekter utenfor Norge 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

and an employee of Kongsberg Defence & Aerospace AS market positions. Hence, the Group will continue to invest with allegations of serious corruption. KONGSBERG is co­­ considerably in product development, but also through operating with Økokrim to clarify the actual circumstances. further market adjustments of the international business In 2014, KONGSBERG celebrated the company’s 200th model. Going forward, the Group will maintain its leading anniversary. This is a milestone very few companies position in innovation and technological development. experience, and KONGSBERG wanted all of its employees, Acquisitions will be a means to supplement the Group’s customers, and partners to participate in the celebration. deliveries, but also to expand the extent of deliveries and The anniversary celebrations were concluded with a major further develop the industrial product range within defence, event in Oslo, attended by H.M. King Harald V, members of maritime and offshore, oil and gas. the Norwegian Government, customers and partners. In the international defence market, KONGSBERG is well KM had a very good year with growth in revenues positioned with its modern product portfolio. The main focus totalling 17.4 per cent, a good EBITDA margin and more than in this market is growth in selected geographical areas both NOK 10 billion in incoming orders. Activity increased in the by own activities, together with partners and acquisitions to Offshore, Merchant and Subsea segments, and all divisions strengthen our presence. KONGSBERG has a successful saw an increased order influx compared to 2013. KDS and long cooperation with the Norwegian Armed Forces. achieved a record-high EBITDA margin of 12.4 per cent and This is important for continued international success. Within has won a number of major and important contracts during KONGSBERG’s maritime product range, the emphasis is on the year, which amounted to new orders of more than NOK achieving growth through further developing leading posi- 9 billion. KPS had reduced revenues and a weak underlying tions, as well as extending the range of deliveries by con­ EBITDA in 2014. However, the intake of orders was strong tinued innovation and acquisitions. KONGSBERG’s portfolio and the business area increased its order backlog by more within oil and gas is relatively small, but comprises unique than MNOK 700 during the year. The many positive signals and newly-developed solutions. The oil and gas market is throughout the year, both related to order inflow, but also quite challenging at the moment, but the main focus over feedback and interest in the expanded product portfolio, a long time perspective in this area will be concentrated on give reason to be optimistic going forward. KOGT had a continuing to contribute to new growth through innovation very challenging year characterised by adjustment and a and acquisitions, both in order to extend existing deliveries, significant decline in the oil and gas market. This yielded but also to establish new bases for growth. negative results, and goodwill was written down by The Group’s growth shall generate satisfactory return for MNOK 300 in 2014. the company as well as our owners. In recent years, the Group has achieved EBITA margins well over ten per cent, a goal to be achieved also over the next five-year period. Future strategy and priorities in 2015 Return on capital is also an important parameter for meas- uring profitability. KONGSBERG has in the last few years KONGSBERG’s focus going forward is to ensure increased had a satisfactory return on employed capital, and it is an competitiveness while also laying the foundation for expressed goal that the return shall be on the same levels continued profitable growth. The Group’s growth ambition, as we have experienced historically. announced in 2013, is to grow by an average of ten per cent As part of securing the Group’s future competitiveness, annually over a five-year period. This growth shall be “DeltaOne”, an efficiency program at group level, was achieved by a combination of organic growth and acquisi- started in the autumn of 2013. The ambition for the pro- tions. Organic growth is to be based on further develop- gram is a realised efficiency gain of NOK 1 billion per year ment and extension of existing products, services and before the end of 2016. More than 50 different initiatives

Backlog of orders New orders MNOK MNOK

25 000 25 000KONGSBERG KONGSBERG

20 000 20 000OSEBX OSEBX

15 000 15 000OSE OSE

10 000 10 000

5 000 5 000

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

KONGSBERG • Annual Report and Sustainability Report 2014 11

1. kv 2. kv.3. kv.4. kv. 1. kv 2. kv.3. kv.4. kv.

Historisk utvikling i driftsinntekter og EBITDA Historisk utvikling i driftsinntekter og EBITDA NOK millioner NOK millioner

20 000 20 000 20 20

15 000 15 000 15 15

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Drif EBITtsinntekterA % Norge Drif EBITtsinntekterA % Norge Driftsinntekter utenfor Norge Driftsinntekter utenfor Norge 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

were started in the Group in 2014, and the program is on Kongsberg Oil & Gas Technologies schedule in relation to goal achievement. DeltaOne will • Better earnings in a challenging market make the Group well equipped to meet the increasing • Strengthen the position for the business area’s software international competition and also secure a satisfactory solutions and niche products within the oil and gas return for our owners. market • Continue developing the product range against the The business areas’ priorities in 2015 subsea and software markets Kongsberg Maritime • Growth outside our own domestic market • Additional efficiency and productivity improvements throughout the value chain • Continue the efforts on aftermarket activities and service Comments to the financial statements portfolio • Secure and take new market positions, within all main Revenues segments The Group’s revenues were MNOK 16,613 in 2014, up 1.8 per • Continue developing cost-efficient product and system cent from MNOK 16,323 in 2013. KM increased its revenues solutions by nearly NOK 1.5 billion, corresponding to 17.4 per cent. • Expand the scope of supply in general and engineering Both KDS and KOGT had a minor reduction in revenues, services in particular while KPS had a reduction of approx. MNOK 800, corre- sponding to 35.3 per cent. Kongsberg Defence Systems • Ensure continued satisfactory completion of the large, EBITDA development ongoing programs in missiles, air defence systems and EBITDA in 2014 constituted MNOK 2,060 (MNOK 2,142). other delivery projects. The Group’s largest business areas, KM and KDS, perform­ • Secure good progress in developing JSM and pursue ed well, increasing both the EBITDA and EBITDA margin in the possibilities that become available with the teaming 2014 compared to 2013. KPS reversed provisions and also agreement with Raytheon reached clarification with customers regarding previous • Maintain a high market activity related to the entire deliveries, which added a total of approx. MNOK 200 in product range positive EBITDA effects. KOGT has a negative EBITDA both • Additional strengthening of strategic foundation in key as a result of failing markets and restructuring. markets Results Kongsberg Protech Systems Profit before tax amounted to MNOK 1,285 (MNOK 1,644). • Continue the work on securing the first contact on the At the end of 2014, the Board decided to write down MCRWS – position KPS for new known possibilities for goodwill in KOGT by MNOK 300. The profit after tax was MCRWS MNOK 800 (MNOK 1,225), corresponding to NOK 7.28 • Continue to focus on costs – introduce further adapta- (NOK 10.24) per share. Return on average capital employed tions to a lower volume for KPS while also preparing the (ROACE) was 16.4 per cent in 2014 (21.5 per cent). organisation for potential rapid growth with MCRW KONGSBERG’s dividend policy stipulates that dividend • Secure existing and establish new positions in the RWS over time shall constitute between 40 per cent and 50 per market cent of the company’s net profit for the year. On this basis, the Board proposes an ordinary dividend for the accounting

EBITDA KONGSBERG MNOK KONGSBERG is an international, knowledge-based group that supplies high-technology systems and solutions to 2 500 KONGcustomersSBERG in the oil and gas industry, merchant marine, defence and aerospace industries. 2 000 OSEBX

1 500 OSEHeadquarter Kongsberg 1 000 Number of employees 7,726 Share of employees outside Norway 38% 500 Number of locations, countries 25 0 Revenues outside Norway 77% 2008 2009 2010 2011 2012 2013 2014

12 KONGSBERG • Annual Report and Sustainability Report 2014

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Drif EBITtsinntekterA % Norge Driftsinntekter utenfor Norge 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

year 2014 of NOK 4.25/share (4.25). In addition, the increased negative value of the Group’s currency portfolio, Board proposes an extraordinary dividend of NOK 5.00/ as well as changes in estimated actuarial gains/losses. share (1.00) – a total of NOK 9.25/share (5.25). The The Group’s net interest-bearing debt (cash less long-term ordinary dividend and total dividend constitute respectively interest-bearing debt) at 31 December 2014 was negative 42.7 per cent and 93.0 per cent of the ordinary profit before (positive net cash balance) by MNOK 3,551 (MNOK 1,935). write down, and, 58.4 per cent and 127.1 per cent of the Long-term interest-bearing debt mainly consists of two ordinary profit for the year. bond loans totalling MNOK 750. The Group also has an In determining the extraordinary dividend, the Board took undrawn syndicated loan facility of MNOK 1,500, which a basis in KONGSBERG’s strong equity and liquidity at the expires in April 2019. The loan facility requires that net end of 2014 and the need to support the company’s growth interest-bearing debt does not exceed three times EBITDA, strategy going forward. The Board concludes that there is but can be up to 3.5 times EBITDA for a maximum of three room for a certain adjustment of the company’s capital quarters. KONGSBERG’s business requires a long-term structure, while also having sufficient financial capacity for perspective in both performance and strategy. At the same any opportunities that arise. On this basis, the Board time, the need for working capital may vary substantially. concluded an extraordinary dividend of NOK 5.00/share. This calls for sound liquidity and predictable access to capital over time. Accordingly, one of the Group’s goals is to Cash flows maintain a good credit rating with its lenders and investors. In 2014, KONGSBERG improved net cash flows from opera- tions by MNOK 332 compared to 2013, to MNOK 2,315 Currency (MNOK 1,983). This primarily includes operating profit KONGSBERG’s currency policy implies that the contractual before depreciation and amortisation (EBITDA) of MNOK currency flows are hedged mainly by using forward con- 2,060 net of taxes and adjusted for changes in net current tracts, fair value (project) hedges. In addition, a portion of assets and accruals. The good cash flow from operations is expected new orders is hedged in line with set principles, a result of generally good EBITDA, a strong focus on costs, cash flow hedges (forecast hedges). as well as more advance payments from customers. MNOK At the end of 2014, the balance of forward contracts 211 of cash flows from operating activities were spent on related to fair value hedges was MNOK 10,532 measured investments, of which MNOK 264 concerned sale of shares at hedged rates. At 31 December 2014, these forward con- related to KONGSBERG’s property portfolio, MNOK 339 tracts had a net negative value of MNOK 1,492. The Group was paid for purchases of property, plant and equipment, also had MNOK 9,240 in cash flow hedges measured at MNOK 46 was related to disbursements from acquisition hedged rates, constituting forward contracts. At 31 of companies, and MNOK 102 was spent in capitalising in-­ ­December 2014, the cash flow hedges had a total net house developments. The cash flow from financing activi- negative value of MNOK 1,031. ties amounted to MNOK – 1,050. This is mainly related to repayment of a bond loan, as well as disbursement of MNOK 628 in dividends to shareholders. The net change in cash and cash equivalents in 2014 amounted to MNOK 1,152.

Capital structure The Group’s equity at 31 December 2014 was MNOK 6,282 or 31.0 per cent of total assets. The equity book value declined by MNOK 375 during 2014, in part as a result of

KONGSBERG Kongsberg Kongsberg Kongsberg Kongsberg Oil & consolidated Maritime Defence Systems Protech Systems Gas Technologies

Revenues 2014 16 613 9 703 4 276 1 566 1 017 2013 16 323 8 264 4 554 2 420 1 077 Change in per cent 1.8% 17.4% (6.1)% (35.3)% (5.6)%

EBITDA 2014 2 060 1 441 530 254 (99) 2013 2 142 1 179 520 419 49 Change in per cent (3.8)% 22.2% 1.9% (39.4)% (302)%

EBITDA margin 2014 12.4% 14.9% 12.4% 16.2% (9.7)% 2013 13.1% 14.3% 11.4% 17.3% 4.5%

KONGSBERG • Annual Report and Sustainability Report 2014 13 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Development in the business areas The Merchant Marine division experienced an increase in new orders of more than 60 per cent compared to 2013. Kongsberg Maritime In general, the development can be attributed to strong market shares, particularly in the bulk and container Amounts in NOK million 2014 2013 segments. KONGSBERG achieved a contract for deliveries to 17 advanced container ships for United Arab Shipping Revenues 9 703 8 264 Company (UASC). In May, KM announced contracts on a EBITDA 1 441 1 179 series of 14 crude oil and product tankers ordered by BP EBITDA margin 14.9% 14.3% Shipping from STX Offshore and Shipbuilding Co. Ltd. The influx of orders was also good for deliveries to gas and Kongsberg Maritime experienced growth in both revenues chemicals tankers, both for integrated automation systems, and the EBITDA margin in 2014. The business area has including vessel performance solutions, as well as load strong market shares within its established market measurement systems. KM appears to have strengthened segments, and strengthened these even further in 2014. its market position even further in the merchant marine Revenues increased by 17.4 per cent, to MNOK 9,703 segments during 2014. (MNOK 8,264). The EBITDA margin was 14.9 per cent, KM’s subsea activity experienced an order inflow in 2014 compared to 14.3 per cent in 2013. New orders increased by that is 25 per cent higher than in 2013. The market for 18.7 per cent, and ended at a record MNOK 10,038 in 2014, autonomous underwater vehicles is growing. KM has compared to MNOK 8,455 in 2013. The order backlog at the positioned itself as the leading player in this market, with end of the year was MNOK 7,480. a strong portfolio of vehicles adapted to various tasks and This strong order backlog provides good predictability for market segments. The product range consists of vehicles the business area in 2015. KM operates in cyclical markets. Hugin, Munin, Remus and Seaglider, with associated KM has a strong market position within the offshore instrumentation. In 2014, the two first AUVs equipped with segment, which resulted in a good inflow of orders from software and sensors for quick inspection of pipelines were both established segments as well as new areas, such as delivered to a customer. The technology can be used on electrical, telecommunications and instrumentation (EIT). In both HUGIN and the new MUNIN. Pipeline inspection using 2014, contracts were signed for deliveries to Petrofac’s new an AUV, which is estimated as being four to six times faster JSD 6000 deepwater pipe-laying vessel, as well as an than the traditional method using an ROV, is expected to important contract for delivery of integrated control and result in major savings for the principal, and could open a safety systems for BW Offshore’s new ‘Catcher’ FPSO. new market for KM. Another major contract is a project-specific agreement The market for seabed mapping is growing and the concerning delivery of safety and automation systems for subsea division has received more orders for underwater Statoil’s four platforms on the Johan Sverdrup field. mapping systems from the survey industry and national players. Seabed mapping is important in connection with

SELECTED KEY CONTRACTS AND EVENTS IN 2014

KONGSBEG gathers KDS signs contract KONGSBERG celebrates KM technology chosen Record number of operations under one roof worth NOK 3.7 billion for its 200th anniversary for several Petrobras summer students at in “Subsea Valley”. NASAMS pipelaying newbuilds KONGSBERG 330 employees in a new building in Asker.

14 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

safe navigation, resource utilisation and sovereignty claims. together with the aftermarket activity, only impacted by Mapping of own waters, continental shelf and Arctic areas the contracting level of shipyards to a limited extent. About is a strategic activity for many nations. 60 per cent of KM’s deliveries are related to the oil and off- The strong influx of orders in the offshore segment is also shore market. reflected in the Subsea division, with contracts for under- The Norwegian maritime and offshore industry has a water navigation and acoustic ‘blowout preventer’ (BOP) strong position and is important for the export industry. systems, that are both sold as an integrated part of control The Board of Directors therefore emphasises the need for systems for offshore vessels (Full Picture Systems), but a governmental industrial policy promoting growth and also as separate deliveries. development in this sector, including competitive conditions KM has equipment installed on more than 17,000 active and financing solutions. vessels. This has resulted in a stable increase in the activi- ties related to aftermarket and customer support. This is an important part of KM’s product portfolio, and is also consid- ered an added value for customers. Continued development of this segment is an important part of KM’s strategy, also going forward. Activities within the seabed mapping, inspection, sea exploration and fisheries segments are,

Distribution of EBITDA Distribution of revenues Per cent Per cent

6% 100 KONGSBERG KONGSBERG Kongsberg Oil & Gas 80 TechnologieOSEBX s 59% OSEBX 60 Kongsberg 40 OSE OSE 9% Maritime 20 Kongsberg Protech 0 Systems -20 Kongsberg Kongsberg Kongsberg Kongsberg Other 26% Maritime Defence Protech Oil & Gas Kongsberg Defence Systems Systems Technologies Systems

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Kongsberg Defence Systems

Kongsberg Protech Systems Historisk utvikling i driftsinntekter100 og EBITDA Kongsberg Oil & Gas Technologies NOK millioner 80 Øvrig virksomhet 60 -100 10 20 30 40 50 2060 000 70 80 20 000 20 20 40 20 15 000 15 000 15 15 0

10 000 -20 10 000 10 10 Kongsberg Kongsberg Kongsberg Kongsberg Øvrig Maritime Defence Protech Oil & Gas virksomhet 5 000 5 Systems Systems 5 T000echnologies 5

0 0 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KONGSBERG signs KONGSBERG chosen KONGSBERG to deliver Successful test firing of NSM Coastal Defence NOK 1.1 billion JSM by Statoil for Johan ocean laboratories for NSM from US Navy’s contract valued at NOK contract with the Castberg project seabed research Littoral Combat Ship 1.3 billions with Poland Norwegian Armed Forces

KONGSBERG • Annual Report and DrifSustainability EBITtsinntekter AReport % 2014 Norge15 Drif EBITtsinntekterA % Norge Driftsinntekter utenfor Norge Driftsinntekter utenfor Norge 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Kongsberg Defence Systems declining in the past few years. The order backlog is solid, and provides in total a good basis for the years to come. Amounts in NOK million 2014 2013 The defence market is characterised by relatively few, but large contracts. Hence, fluctuations in orders are regarded Revenues 4 276 4 554 to be normal. EBITDA 530 520 KONGSBERG has over time, in cooperation with the EBITDA margin 12.4% 11.4% Norwegian Armed Forces and the Norwegian Defence and Research Establishment, developed systems for Norway KDS has experienced significant activity both within that have proved to be competitive internationally. It is of development, deliveries and markets in 2014. Revenues great importance to the Group that this national partnership constituted MNOK 4,276 (MNOK 4,554). The EBITDA continues. The cooperation provides the Norwegian Armed margin increased from 11.4 per cent to 12.4 per cent, Forces with a possibility to develop and deploy technology resulting in an EBITDA of MNOK 530 (MNOK 520). There that is particularly suitable for Norwegian conditions as well was major activity on the delivery side for both NASAMS to as maintaining a quality and cost that allows for it to Finland and Naval Strike Missile (NSM) to Norway, as well succeed in the international competition. In the summer of as the coast artillery system to Poland. In December, a new 2014, the Royal Norwegian Navy participated in the interna- contract was signed with Poland for delivery of coast tional RIMPAC drill. During the drill, the Norwegian Navy artillery to another squadron. Air defence for Finland and demonstrated KONGSBERG’s Naval Strike Missile. The the first coast artillery contract with Poland are now in the demonstration was very successful and garnered increased final stages. The record NASAMS contract of NOK 3.7 interest from potential new international customers. billion where KONGSBERG is a sub-supplier also started in The customers of large defence systems are the defence 2014. Activity in this project will increase in 2015. authorities in the respective countries. These customers The activity level was high in the Joint Strike Missile consider national security and domestic economic develop- (JSM) development program in 2014, and the final phase ment as a significant factor, in addition to product price and development contract for the missile was signed in June. performance, when purchasing defence equipment. The This was also expanded with a part two of MNOK 280, market is not subject to international free trade agreements which includes production of test missiles, auxiliary equip- and is often characterised by more national protectionism ment and missile testing from F-16 in the period 2015–2017. than is to be seen in most other industries. It is important Considerable interest has been shown in the missile for the Norwegian defence industry that the emphasis is on from potential customers, also outside Norway. In June, securing solid agreements in connection with the purchase KONGSBERG and US company Raytheon entered into an of defence equipment from abroad – be it repurchase agreement to market and potentially deliver JSM to the US agreements, joint development agreements and agreements and the international market. The agreement is also consid- that ensure market access. When the Norwegian Armed ered to significantly increase the missile’s market potential, Forces make significant investments through foreign particularly in the US. suppliers, this ties up a significant part of the defence KDS has a modern product portfolio with several newly budget, and purchases from domestic suppliers may be developed systems and products considered to be at the negatively affected. To ensure military supplies that are well beginning of their life cycle. These include the anti-aircraft adapted to Norwegian conditions and a sustainable and system NASAMS and missiles NSM and JSM, all regarded competitive Norwegian defence industry, we emphasise the to have a great market potential. The market activities importance of Norwegian participation in such programs. around these projects and the remaining systems of the Both the Government and the Parliament have stressed business area were high in 2014. There is growing activity the importance of industrial participation for Norwegian and better profitability in the Aerostructures segment. industry, and that this is in line with international practice. Activities at the Arsenal have been recognised for the good Such participation for KONGSBERG also means increased quality of the products they deliver. During the year several activities in many of the business area’s approximately important contracts were signed, of which the following are 1,000 Norwegian subcontractors. mentioned below: Predictability in the export regulations with respect to • NASAMS contract of NOK 3.7 billion for deliveries to defence material and the application of the regulations Raytheon also constitutes an important framework condition for • New orders totalling MNOK 450 from the F-35 program KONGSBERG. KONGSBERG will continue to emphasise • Coast artillery for a new squadron in Poland, worth NOK partnerships with major defence contractors and continue 1.3 billion to support the local industry in the business area’s markets • Development contracts JSM for a total of NOK 1.4 billion further. KONGSBERG’s position as an attractive defence with the Norwegian Armed Forces supplier in the international market will continue to be based • Contract with the US Navy for testing NSM from the on close cooperation with the Norwegian Armed Forces. Littoral Combat Ship This cooperation is the platform for developing leading KDS enters 2015 with an order backlog of MNOK 9,471, products that are necessary for a modern military defence. compared to MNOK 5,489 at the beginning of 2014. The order backlog increased considerably during the year after

16 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Left: From Shangai

Right: From Johnstown

Kongsberg Protech Systems to ‘reset and repair’. • Contract with the Norwegian Defence Logistics Amounts in NOK million 2014 2013 Organisation (FLO) – upgrade of existing material and deliveries of the PROTECTOR ”Nordic” weapons Revenues 1 566 2 420 management system. EBITDA 254 419 • The remaining orders consist of many smaller orders from EBITDA margin 16.2% 17.3% a total of 15 countries. KPS has during the last decade grown to become the world Kongsberg Protech Systems had a year characterised by leader of remote-controlled weapons systems. Contractual low revenues but high market and development activity. deliveries amount to more than 18.000 systems, of which The final weapons station under the CROWS II contract, approx. 17,000 are delivered to customers in 17 countries. which was signed in 2007, was delivered in the first half of The US is, both directly with the US Army and via vehicle 2014 and the business area’s remaining contracts have a suppliers, the largest customer. In recent years there has lower margin level compared with this. KPS continues to been a clear shift concerning the origin of the revenues, dominate the existing RWS markets in NATO countries. both geographically and in relation to the portion of new The CROWS II program, which KPS won in August 2012, sales /aftermarket. From 2009 to 2011, the US accounted provides a foundation for new RWS opportunities in the US. for almost 90 per cent of the business area’s revenues. In The majority of orders for this program have so far been 2014, this was 65 per cent. The share of new systems related to ‘reset and repair’ of existing systems and new compared to aftermarket activities is also changing. In 2010, development activities. over 4,000 new systems were delivered, compared to After many years of strong growth, KPS entered into a approximately 500 in 2013 distributed in deliveries to eight phase with lower delivery volumes in 2011. Revenues were countries. The aftermarket activities have, however, been further reduced from 2012 to 2014, mainly caused by reduc­ more stable in the period, but vary somewhat from one year ed demand and the fact that the largest customer no longer to another as a consequence of the customers’ patterns in had major immediate requirements. Revenues totalled purchasing spare parts. In 2014, deliveries of new weapons MNOK 1,566, down from MNOK 2,420 in 2013. EBITDA stations accounted for just under 40 per cent of revenues. amounted to MNOK 254 (MNOK 419). The EBITDA margin The remaining are mainly distributed between ‘reset and in 2014 ended at 16.2 per cent (17.3 per cent). The high repair’ of earlier stations, spare parts and development margin is impacted by approx. MNOK 200 related to reversal assignments. of provisions and clarification with customers regarding KPS is starting 2015 with an order reserve of MNOK previous deliveries. In 2014, the EBITDA was negatively 3,523, an increase of more than MNOK 700 in one year. impacted by very high market activity related to Medium The business area has a product range considered to be Calibre Remote Weapon Stations (MCRWS), as well as cost well adjusted to future market requirements. In later years, overruns in two development projects. the product portfolio has been developed with several Total orders received in 2014 amounted to MNOK 2,240 variances around the core product, both lighter and heavier (MNOK 2,005). The following are some of the contracts versions, but also solutions for markets outside the vehicle signed: segment. The most important development program has • Orders under CROWS III framework agreement, total been MCRWS. MCRWS is considered to have great market value MNOK 1,300, of this, just under 30 per cent was potential, also in new markets, and the interest for the related to new systems, the remaining was mostly related product is significant. MCRWS is important to realise future

KONGSBERG • Annual Report and Sustainability Report 2014 17 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

possibilities. The product is now ready for sale and a tender The primary focus in the business area is now to create for systems for a larger vehicle program was submitted in profitability going forward. Revenues in the business area the second half of 2014. will fluctuate as a result of progress in certain major projects and the licence sales of software systems. Kongsberg Oil & Gas Technologies Other activities Amounts in NOK million 2014 2013 Other activities mainly consist of eliminations and external revenues from the real estate business. Revenues 1 017 1 077 EBITDA (99) 49 EBITDA margin (9.7%) 4.5% Other factors and incidents

Kongsberg Oil & Gas Technologies had a challenging 2014 Charge in corruption case Romania with weak results and few new orders. In 2014, the business In February 2014, charges were taken out against Kongs- area carried out multiple restructuring processes, including berg Gruppen ASA, Kongsberg Defence & Aerospace AS a 10 per cent reduction in staffing. Several units were also and an employee of Kongsberg Defence & Aerospace AS co-located. 2014 was characterised by the cancellation or with allegations of serious corruption related to deliveries of postponement of several planned and already awarded communication equipment to Romania from 2003 to 2008. projects. KONGSBERG is cooperating with the Norwegian National Revenues in 2014 totalled MNOK 1,017 (MNOK 1,077) and Authority for Investigation and Prosecution of Economic EBITDA amounted to MNOK -99 (MNOK 49). The activity and Environmental Crime (Økokrim) to clarify the actual level was lower than planned both as a result of lower soft- circumstances, but it must be expected that it will take ware licence sales and postponement of several subsea some time yet before the investigation is complete and the projects. This created challenges on the cost side through- case can be concluded. out 2014. The restructuring costs that were implemented to KONGSBERG has zero-tolerance for corruption, and adapt the organisation to a lower activity level constituted high ethical standards are an integrated part of our busi- a total of MNOK 45 in 2014. The measures are related to ness. KONGSBERG has over several years established and both organisation and capacity adaptations, and means that further developed compliance guidelines and functions at KOGT enters 2015 better adapted to the changed market group level and in the business areas. The current anti-­ conditions. Goodwill was written down by MNOK 300 in corruption system is considered to be at a good interna­ 2014. The impairment was carried out due to the business tional level, and has also been assessed by external parties area’s weaker prospects and the changed market condi- to constitute a solid and robust system. Reference is also tions. made to the section: “Risk factors and risk management” Due to general reductions in the oil companies’ explora- in the Board of Directors’ Report. tion and development budgets, as well as a sharply declining At this point in time, it is not possible to estimate the oil price, several projects have been delayed or stopped. result of Økokrim’s investigation or other effects of the This affects both the business area’s subsea activities, charge and the circumstances on which is has been based. where projects have been postponed or cancelled, and the Accordingly, it is not possible to estimate any possible software activities, which received considerably less orders financial effects for KONGSBERG. than anticipated. The tender activity in both areas is still acceptable, but increased uncertainty in the industry as Lawsuit from Rolls-Royce Marine AS against a whole entails that many investment decisions are Kongsberg Evotec AS postponed or cancelled. Despite a weak market, several In 2014, KONGSBERG was sued by Rolls-Royce Marine AS. important contracts were signed during the year, for The main hearing in the case between Kongsberg Evotec example expanded concept evaluation and pre-FEED (Front and Rolls-Royce Marine took place in the Ålesund District End Engineering and Design) for Statoil’s Johan Castberg Court from 9 February to 3 March. Rolls-Royce has sub­ project in the Barents Sea and multiple studies aimed at use mitted a statement of claim to the effect that Kongsberg of new technology. Within Software, LedaFlow licences Evotec AS shall be prohibited from selling, producing and were sold to Chevron, among others. The development marketing complete equipment packages for aft deck contract BP WellAdvisor was continued and has been called operations on seismic vessels, as well as a number of a very important project by the customer. KOGT’s order individual products, for a period according to the Court’s backlog declined by about 45 per cent over the course of discretion. They have also submitted a claim for compensa- 2014. This includes in excess of MNOK 200 in cancellations. tion according to the Court’s discretion, indicated in the The majority of this is related to the Polarled contract with order of MNOK 279 to 395. KONGSBERG has submitted a Statoil. Order inflow for the year is MNOK 802 (MNOK statement of claim for full acquittal. The case has been 1,385), where the distribution between software and submitted for judgement and we are awaiting the District subsea-related orders is about 60/40. The order backlog Court’s decision. was MNOK 396 at the end of 2014.

18 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Prospects for 2015 measures are expected to yield results in 2015. A future-­ oriented product portfolio is considered to provide good Kongsberg Maritime delivered strong results and a high opportunities for the business area over time, but in the influx of orders in an increasingly challenging market in 2014. short term the business area is characterised by the The offshore market is currently in a period with consider­ weakened market prospects and a lower activity level is ably lower contracting of new vessels, which will result in anticipated in 2015. fewer orders from this segment. Good activity is still ex- KONGSBERG has a solid order backlog and maintains pected within gas and advanced merchant marine vessels. strong market positions within the shipping, offshore and Prospects are good in KM’s subsea market, particularly defence markets. This provides a solid foundation for a within subsea monitoring and subsea construction. A strong generally good activity level in 2014. market position in all segments, record-high order reserve, and equipment installed on nearly 17,000 vessels, provides a good foundation for the business area’s activity level The KONGSBERG share and shareholders throughout 2015. Kongsberg Defence Systems won several important The price of the KONGSBERG’s share decreased from contracts in 2014, which resulted in a solid increase in the NOK 127.50 at the end of 2013 to NOK 123.00 at the end order backlog. The defence market in general has grown of 2014. This provides a market capitalisation at the end of stronger in the past year, and KDS is positioned as a leading 2014 of MNOK 14,760. Including the dividend of NOK 5.25 supplier in its niches. This provides good opportunities in per share, the return was just above half a percentage point a market with several important short-term and long-term in 2014. During the same period the All-Share Index contract possibilities for missiles, air defence, submarine (OSEBX) on the Oslo Stock Exchange had a positive trend systems and communications. These conditions provide a of 5.3 per cent. As of 31 December 2014, KONGSBERG had strong foundation for the business area’s activity level in 8,014 shareholders, an increase of 268 from the previous both 2015 and the future. year. The Group had 976 (975) foreign shareholders who Kongsberg Protech Systems has undergone a period collectively owned 13.14 per cent (10.85 per cent) of the of decreasing demand in the market for remote-controlled shares. The Norwegian State, represented by the Ministry weapons systems. In 2014, the inflow of orders increased of Trade, Industry and Fisheries, is the largest shareholder again. The business area has a globally leading position with with a stake of 50.001 per cent of the shares. The 10 largest remote-controlled weapons systems and has also further shareholders had at the end of the year a total of 76.43 per expanded its product portfolio, with the Medium Calibre cent (77.76) of the shares. The number of shares outstand- Remote Weapon Station, among other things. Hence, KPS ing is 120 million, each with a nominal value of NOK 1.25. is considered to be well-positioned to meet expected future KONGSBERG has paid dividends to its shareholders in needs. Activity is expected to increase in 2015 compared every year since the company was listed in 1993, except to previous years. from in 2000 and 2001. Dividend shall over time constitute Kongsberg Oil & Gas Technologies’ development in 2014 between 40 and 50 per cent of the company’s ordinary was unsatisfactory. The oil and gas market is in the midst profit after tax. In determining the size of the dividend, the of a period with reduced investments, which is challenging expected future capital requirements shall be considered. At for the business area. Many measures were implemented in the Annual General Meeting on 9 May 2013, it was decided 2014 to meet the tougher market, and the implemented to pay a dividend of NOK 4.25 per share for 2013, as well as

Follow the Sun support centre, Kongsberg

KONGSBERG • Annual Report and Sustainability Report 2014 19 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

an extraordinary dividend in connection with KONGSBERG’s Risk factors and risk management 200th anniversary of NOK 1.00 per share, which amounted to a total dividend of NOK 5.25 per share. KONGSBERG is exposed to different types of risks, and the For 2014, the Board proposes an ordinary dividend for the Board of Directors closely monitors trends in the various risk accounting year 2014 of NOK 4.25/share (4.25) and an areas. The Board of Directors is of the opinion that there is extraordinary dividend of NOK 5.00/share (1.00) – a total a healthy balance between the overall risk and the Group’s of NOK 9.25/share (5.25). The ordinary dividend and total capacity to deal with risk. The administration prepares dividend constitute 42.7 per cent and 93.0 per cent, re­ monthly operating reports and quarterly risk reports which spectively, of the ordinary profit for the year before depreci- are reviewed by the Board of Directors. In addition, the ation. The ordinary dividend and total dividend constitute Board of Directors and the administration perform risk 58.4 per cent and 127.1 per cent, respectively, of the analyses when considering major investments, tenders, ordinary profit for the year. In determining the size of the initiatives and acquisitions. The Board of Directors has an dividend, depreciation was not included in the assessment Audit Committee to help deal with accounting and relevant basis, in line with previous practice. discretionary items, and to follow up internal control, compli- In 2014, a total of 12.9 million (14.0 million) KONGSBERG ance and risk management within the Group. The Audit shares were traded in 36,354 (38,205) transactions. Committee meets, as a minimum, in connection with the The company works actively to promote interest in the issue of annual and interim financial statements. share through activities within the investor markets. The Group’s activities are international with delivery of KONGSBERG is regularly represented at road shows, high-tech systems and solutions, primarily to customers in meetings and conferences both in Norway and abroad. the offshore market, merchant marine and defence. Market The goal for 2015 is to continue the high activity against risk could therefore vary somewhat within these different the investor market. Investor presentations are held in segments. connection with the quarterly reports, as well as an annual The offshore market comprises exploration, development, Capital Markets Day. At year-end, 12 securities firms had production and transport of oil and gas. There are also sup- active coverage of the share. In 2014, KONGSBERG was port functions such as supply services, operational support, ranked third in the category “Best Norwegian Company, as well as maintenance and service on platforms and Large Cap”, in the annual IR Nordic Markets competition. vessels. KONGSBERG is a supplier of products and services The Board of Directors believes that employee share for all these segments. The demand for energy and oil price ownership is positive. At 31 December 2014, more than development will impact the willingness to invest in this 2,200 employees held approximately 3.6 million shares in market. The investment levels could also vary between the total in KONGSBERG. This represents approximately three various geographical areas depending on e.g. oil reserves per cent of the shares. During the spring of 2014, the and the level of exploration and production activities. More Group’s annual share program for employees was carried challenging oil and gas fields create new niches in the out for the 18th time. A total of 497,389 (590,890) shares market, which in turn create the need for new technological were sold at a price of NOK 113.20 (20 per cent discount on solutions. the market price). 2,112 (1,914) employees took advantage The merchant marine market includes all types of vessels of the offer. from simple dry cargo ships to advanced tankers. Passenger ships in cruise and ferry traffic are also an important part of the market. Contracting of new ships is closely linked

From Zhenjang

20 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

with the expected development in transport demand. The KONGSBERG’s currency policy implies that the contractual development in the global economy influences the demand currency cash flows are hedged mainly by using forward for water transport of people, energy, raw materials and contracts (project hedges). In addition, the Group hedges finished products. The type of ship and geographical areas a portion of the expected new orders according to the also influence the market. established policy (forecast hedges). The policy regulates Products and systems are delivered to land-based, air- how much of the expected orders shall be hedged, depend- based and sea-based defence in the defence market. Due ing on the timing of the expected orders and currency to strict security requirements and protection of various levels. In this manner, the Group seeks to mitigate the countries’ own defence industry, it is often difficult for effects of currency fluctuations of up to two years. defence suppliers to win defence contracts outside their KONGSBERG has for several years established and own borders. There is a significant degree of protectionism developed compliance functions at group level and within in both the US and Europe. However, there are still oppor­ the business areas. Regulations, as well as monitoring and tunities through long-term relationships and niche products. reporting systems are established for managing risks related This is partially safeguarded through KONGSBERG’s rela- to areas such as anti-corruption, supply chains and whistle-­ tionships with major foreign defence companies. blowing. The Group’s value creation primarily comprises delivery Key policy documents are reviewed and updated on of systems of high technological complexity. Deliveries are a regular basis. Training within the area of ethics and generally organised as projects. An effective management compliance is carried out in the entire organisation, both of projects is a key success factor in reducing operating risk. in Norway and abroad. An extensive evaluation of KONGSBERG has established goals for project manage- KONGSBERG’s anti-corruption program was carried out in ment based on internal and external “best practice”, and 2014. The evaluation confirmed that the program satisfies project managers attend an internal training program con- both national and international regulations, as well as cerning this matter. The projects’ revenues are based on requirements for sound routines, training, etc. contracts, and the uncertainty is mainly related to estimat- The Board of Directors considers KONGSBERG’s com­ ing the remaining costs and determining the percentage pliance program to hold good international level. of completion. The Group has established principles for categorising projects in terms of technological complexity and development content. This forms the basis for an Technology, research and development assessment of “profit at risk” and recognition of revenue in the projects. “Profit at risk” is the result retained in the A significant portion of the value created by KONGSBERG projects until any uncertainty is resolved. KONGSBERG has consists of the development of high-tech solutions to the a range of projects in progress and a strong order backlog. domestic and international market. High competence and Cancellations within the shipyard industry, increased com- knowledge sharing are essential to the competitiveness. petition, declining defence budgets in several countries and KONGSBERG’s extensive knowledge within dynamic posi- a general and lasting economic downturn have, however, tioning is due to the expertise developed in connection with increased the Group’s risk and may over time influence the control systems for submarines and missiles. The Group’s Group’s level of activity. The Group operates in several systems and products are mainly focused around four core markets which to a large extent are affected by independ- areas of competence: signal processing, system integration, ent drivers. Cyclical fluctuations will influence these regulatory systems (cybernetics) and software develop- markets, both to various degrees and points in time. ment. KONGSBERG continuously invests in product Financial risk at KONGSBERG is managed centrally by development, both internally financed and through guidelines for financial risk management adopted by the customer-funded programs. Over time, the total costs of Board of Directors and included in the Group’s financial product development account for about 10 per cent of policy. KONGSBERG is exposed to various financial risks, operating revenues. and aims to balance the financial risk elements in order to promote predictability in the Group. The Group’s financial risk management is described in detail in Note 5 “Manage- Corporate social responsibility ment of capital and financial risk”. KONGSBERG has a diversified customer base mainly KONGSBERG shall represent a sustainable development comprising public institutions and larger private companies characterised by a sound balance between economic in a number of countries. Historically, the Group has had performance, creating value and social responsibility. The minor losses on receivables. Measures to limit the risk strategic and commercial choices made in the Group are ex­posure are implemented continuously where necessary. based on a sustainable perspective. The Group’s liquidity risk is managed centrally by requiring The Group’s policy for Sustainability and Corporate Social loans to be renewed well in advance of maturity as well as Responsibility is built around two main elements: commer- the use of liquidity prognoses. With a large portion of cial opportunities related to global megatrends and sustain­ foreign customers and revenues in foreign currency, the able technology, and risk related to “license to operate” and Group’s revenues are affected by fluctuations in exchange global megatrends. rates.

KONGSBERG • Annual Report and Sustainability Report 2014 21 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Left: From Kongsberg

Right: From Shanghai

In 2015, KONGSBERG will continue to focus on anti-­ Climate and environment corruption, follow-up of regulations relating to human and employee rights and to continue the work related to The climate and environmental statement provides an

corporate social responsibility in the supplier network. overview of KONGSBERG’s consumption of energy, CO2 Reference is made to the corporate responsibility report for emissions and waste production and our consumption of a more detailed description of the Group’s corporate social water. responsibility efforts. The report has been evaluated and The Groups’ most significant positive contribution to approved by the Board of Directors. the climate challenges is that an increasing number of our products and solutions are contributing in various ways to re­duc­ed emissions. This will be a key topic of the new Health, safety and the environment climate and environment strategy that will be prepared in 2015. The Board of Directors is of the opinion that health, safety KONGSBERG’s activities contribute to only a small and environment is handled in a manner that promotes extent to the emission of greenhouse gas. In 2014, we job satisfaction and a sound working environment. One reduced our energy consumption by 2.6 per cent compared basic principle is that the HSE work should be preventive. to the previous year. However, the Group’s growth in recent The Board of Directors is closely monitoring the work by years with establishment of several new offices has resulted quarterly reviewing HSE reports. During 2014, effort has in increased activity, which caused our total impact on the been put into the HSE training and further improving HSE external environment to increase slightly. According to the

reporting routines. The reporting routines of the foreign climate statement, our CO2 emissions increased by 2.8 per subsidiaries are good, and figures on absence due to illness cent from 2013 to 2014. The increase was largely caused and accidents from the offices abroad are a natural part by the number of flights related to the increased activity of the HSE report. described above. A detailed overview of the climate and During 2014 there were 380 work accidents within the environmental statement for 2014 can be found in the Group. Recorded injuries resulting in absence were 34, while Group’s report on sustainability for 2014, pages 135–137. 164 injuries did not lead to absence. 182 events required We will continue our work to map and implement treatment. The total number of work-related injuries with elements that are not currently part of our climate state- and without absence, TRI, constituted 4.56 per cent in ment in 2015, for example transport of goods and services. 2014, an increase from 3.69 per cent in 2013. There are no The Groups reports to the international framework registered occupational diseases or work-related fatalities “Carbon Disclosure Project” on issues relating to climate during 2014. Total absence due to illness increased some- changes and the level of greenhouse gas emissions. what from 2.5 per cent in 2013 to 2.6 per cent in 2014. No serious incidents related to environmental pollution All employees in Norway have access to company health were reported in 2014. services. This varies in accordance with local practices and legislation in our foreign business activities. KONGSBERG has many employees outside Norway, 38 per cent at the end of 2014. This requires additional attention and insight with respect to HSE issues in the countries in which we operate.

22 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Personnel and organisation KONGSBERG’s strategy. Leadership@KONGSBERG, the Group’s ‘performance management process’, has been Number of employees 31 Dec 2014 31 Dec 2013 developed in order to clarify and provide quality assurance of processes for goal setting, goal achievement and evalua- Kongsberg Maritime 4 652 4 260 tion, and for ensuring a controlled development of the Kongsberg Defence Systems 1 672 1 761 Group’s global management capacity. The Group educates Kongsberg Protech Systems 650 644 skilled workers within several disciplines in cooperation with Kongsberg Oil & Gas Technologies 630 709 the education company Kongsberg Technology Training Group centre 60 57 Centre AS, partly owned by KONGSBERG. During 2014, Kongsberg Teknologipark 62 62 Total Group 7 726 7 493 there were 19 apprentices in total. In addition, the company Share outside Norway 38% 36% facilitates and stimulates for employees to acquire certifi- cates of completed apprenticeship as private candidates, so called practice candidates. In 2014, four employees acquired KONGSBERG is continuously working on adapting the certificates of completed apprenticeship by this program. organisation to the Group’s markets. Efforts are made to Cooperation with employee unions and organisations develop the Group’s international establishments. This is through established cooperation and representation both cost effective and provides local presence and com- arrangements are well functioning and constitutes valuable petitiveness. One of the Group’s goals is that our interna- contributions in meeting the Group’s challenges in a con- tional subsidiaries as far as possible should be staffed with structive manner. local employees. The Board of Directors has decided to pay a bonus of KONGSBERG has a unique and strong culture that has NOK 4,000 to all employees and wishes to thank all staff for been developed over several years. Common values and their hard work during the year. management principles are implemented for the entire Group. An important condition for long-term success is that Equal rights KONGSBERG manages employees’ competence in a good manner. A goal is to develop and increase the diversity KONGSBERG has a personnel policy designed to ensure within the Group, so that different experience, culture, equal opportunities and rights, and to prevent discrimination education and ways of thinking are represented. This helps on the grounds of ethnicity, national origin, skin colour, to increase the ability for renewal and provides for better language, religion, philosophy of life, age or gender. A total decisions. The Group is aiming to increase the exchange of of 1,612 (20.9 per cent) of the employees are women, and knowledge and staff between the business areas. Good two of five shareholder-elected directors on the Board of work processes and development opportunities are impor- Directors are women. As of 1 January 2015, one woman is tant incentives in recruiting and retaining good employees. represented in corporate executive management. The com- KONGSBERG emphasises education, and is continuously pany considers it important to promote gender equality and working to develop and coordinate training for our employ- prevent discrimination in conflict with the Gender Equality ees. 64 per cent of KONGSBERG’s employees have college Act. In the opinion of the Board of Directors’, the Group or university level education. complies with current regulations. KONGSBERG invests in leadership programs. High As the extent possible, KONGSBERG tries to adapt competence and capacity among the leaders of the Group working conditions so that individuals with diminished is one of the most important elements in achieving functional abilities can work for the Group.

Geographical distribution of employees Geographical distribution of revenues

23% Norway KONGSBERG KONGSBERG 8% Rest of Europe 4% Other OSEBX OSEBX 62% Norway 23% America OSE OSE 18% Asia 21% Europe

28% Asia 12% America

KONGSBERG • Annual Report and Sustainability Report 2014 23

1. kv 2. kv.3. kv.4. kv. 1. kv 2. kv.3. kv.4. kv.

100 Historisk utvikling i driftsinntekter100 og EBITDA Historisk utvikling i driftsinntekter og EBITDA 80 NOK millioner 80 NOK millioner 60 60 20 000 20 000 20 20 40 40 20 20 15 000 15 000 15 15 0 0

-20 10 000 -20 10 000 10 10 Kongsberg Kongsberg Kongsberg Kongsberg Øvrig Kongsberg Kongsberg Kongsberg Kongsberg Øvrig Maritime Defence Protech Oil & Gas virksomhet Maritime Defence Protech Oil & Gas virksomhet Systems Systems 5 T000echnologies Systems Systems 5 T000echnologies5 5

0 0 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Drif EBITtsinntekterA % Norge Drif EBITtsinntekterA % Norge Driftsinntekter utenfor Norge Driftsinntekter utenfor Norge 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Some of KONGSBERG’s operations include projects that Profit for the year and allocation of net profit require special security clearances for employees. In certain cases, this may place constraints on which individuals can The parent company Kongsberg Gruppen ASA had a net be hired. profit of MNOK 1,330 in 2014. The Board of Directors proposes the following allocation of net profit in Kongsberg Gruppen ASA: Corporate governance Dividends MNOK 1 110 KONGSBERGS’s objective is to protect and enhance To other equity MNOK 220 stakeholder value by engaging in a profitable, growth-­ Total allocated MNOK 1 330 oriented industrial development in a long-term, international perspective. Good corporate governance and leadership The proposed dividend constitutes 93.0 per cent of the shall ensure the best possible value creation, and the Group’s ordinary profit for the year before depreciation. Group’s resources shall be used in an efficient, sustainable Depreciation is not included in the dividend assessment. manner. Values created should benefit shareholders, em- The ordinary part of the dividend complies with the ployees, customers and society in general. company’s dividend policy. The Board of Directors considers it important to review The Group’s liquidity and financial position are good, and and update the Group’s corporate governance documents the future prospects are stable. annually to comply with the “Norwegian Code of Practice for Corporate Governance”. According to Section 3-3b of the Accounting Act, the company shall prepare a statement Going concern on corporate governance. The statement will, pursuant to Section 5-6 of the Public Limited Companies Act, be In compliance with Section 3-3a of the Norwegian discussed at the Annual General Meeting. The description Accounting Act, it is confirmed that the going concern on pages 86–99 is based on the latest revised version of assumptions continue to apply. This is based on forecasts the Norwegian Code of Practice for Corporate Governance for future profits and the Group’s long-term strategic of 30 October 2014. prognoses. The Group is in a healthy economic and financial position.

Salaries and other remuneration to senior executives

The Board of Directors has a separate Compensation Committee which deals with all significant matters related to wages and other remuneration to senior executives before the formal discussion and decision by the Board of Directors. In line with the Norwegian Companies Act, the Board of Directors has also prepared a statement on the remuneration of the Group CEO and Executive Manage- ment included in Note 28 to the consolidated financial statements.

Kongsberg 20 March 2015

Finn Jebsen, Chairman Anne-Lise Aukner, Deputy chairman Irene Waage Basili, Director Roar Flåthen, Director Morten Henriksen, Director

Magnar Hovde, Director Helge Lintvedt, Director Roar Marthiniussen, Director Walter Qvam, President and CEO

24 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

FINANCIAL STATEMENTS AND NOTES

Kongsberg Gruppen (Group)

Content Page Content Page

Consolidated income statement for 31 – List of Group companies 70 the year ended 31 December 26 32 – Investments in joint arrangements and Consolidated statement of comprehensive income assosiated companies 71 for the period 1 January–31 December 26 33 – Transactions with related parties 72 Consolidated statement of financial position at 31 December 27 34 – Contingent liabilities 72 Consolidated statement of changes in equity 1 January–31 December 28 Consolidated statement of cash flows 1 January–31 December 29 Kongsberg Gruppen ASA Notes 30 1 – General information 30 Content Page 2 – Basis for the preparation of the consolidated financial statements 30 Income statement and balance sheet 73 3 – Summary of significant accounting policies 31 Statement of cash flows 74 4 – Fair value 37 Notes 74 5 – Financial risk management objectives and policies 38 1 – Accounting policies 74 6 – Segment information 39 2 – Equity reconciliation 75 7 – Sale of property 41 3 – Shares in subsidiaries 76 8 – Inventories 42 4 – Payroll expenses and auditor’s fee 76 9 – Payroll expenses 42 5 – Pension 77 10 – Pensions 42 6 – Income tax 78 11 – Property, plant and equipment 47 7 – Long-term interest-bearing loans and credit facilities 78 12 – Intangible assets 48 8 – Guarantees 79 13 – Impairment testing of goodwill 49 9 – Related parties 79 14 – Finance income and finance expense 50 10 – Currency hedging 81 15 – Income tax 51 11 – Cash and cash equivalents 83 16 – Earnings per share 52 12 – Sale of property 83 17 – Available-for-sale shares 52 18 – Other non-current assets 53 Statement from the Board of Directors 83 19 – Receivables 53 20 – Construction contracts in progress 55 21 – Financial instruments 56 21A – Derivatives 56 Auditor’s Report 2014 84 21B – Currency risk and hedging of currency 56 21C – Cash flow hedges 58 21D – Interest rate risk on loans 59 21E – Liquidity risk 60 21F – Summary of financial assets and liabilities 61 21G – Assessment of fair value 62 21H – Estimation uncertainty 62 22 – Cash and cash equivalents 62 23 – Share capital 63 24 – Provisions 64 25 – Other current liabilities 64 26 – Assets pledged as collateral and guarantees 65 27 – Sale and leaseback 65 28 – Statement on the remuneration of the Group CEO and Executive Management 66 29 – Compensation for Executive Management and the Board of Directors 68 30 – Auditors’ fees 69

KONGSBERG • Annual Report and Sustainability Report 2014 25 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER Kongsberg Gruppen (Group)

MNOK Note 2014 2013

Revenues 16 552 16 323 Profit on sale of property 7 61 - Total revenues 6 16 613 16 323 Cost of goods sold 8 (5 572) (5 415) Personnel expenses 9 (6 118) (5 742) Other operating expenses 30 (2 925) (3 024) Share of net income from joint arrangements and assosiated companies 32 62 - Operating profit before depreciation and amortisation (EBITDA) 6 2 060 2 142 Depreciation 6, 11 (342) (345) Operating profit before amortisation (EBITA) 6 1 718 1 797 Amortisation 6, 12 (140) (138) Impairment 6, 12, 13 (320) - Operating profit (EBIT) 6 1 258 1 659 Finance income 14 137 95 Finance expenses 14 (110) (110) Profit before tax 1 285 1 644 Income tax expense 15 (405) (419) Profit for the year 880 1 225

Attributable to Equity holders of the parent 873 1 228 Non-controlling interests 7 (3)

Earnings per share in NOK – profit for the year / diluted profit 16 7.28 10.24

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE PERIOD 1 JANUARY–31 DECEMBER Kongsberg Gruppen (Group)

MNOK Note 2014 2013

Profit for the year 880 1 225

Specification of other comprehensive income Items to be reclassified to profit or loss in subsequent periods Change in fair value: – Cash flow hedges, currency 21C (1 098) (465) – Interest rate swaps (13) 4 – Available-for-sale shares 17 (6) (7) Income tax effect in cash flow hedges and interest rate swaps 298 129 Translation differences, currency 309 123 Net total items to be reclassified to profit or loss in subsequent periods (510) (216)

Items not to be reclassified to profit and loss Actuarial gains/losses, pension 10 (168) (239) Income tax on items remaining in equity 15 45 67 Actuarial gains/losses joint arrangements and assosiated companies after tax 10, 32 (6) - Net total items not to be reclassified to profit and loss (129) (172) Total other comprehensive income for the period (639) (388) Total comprehensive income for the period1) 241 837

Attributable to Equity holders of the parent 234 840 Non-controlling interests 7 (3)

26 KONGSBERG • Annual Report and Sustainability Report 2014 1) Total comprehensive income for the period is the sum of the period’s ordinary income (profit for the year) and other comprehensive income. The other comprehensive income is the sum of the changes to items recognised directly to equity in the period. 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER Kongsberg Gruppen (Group)

MNOK Note 2014 2013

Assets Non-current assets Property, plant and equipment 11 2 477 2 655 Goodwill 12, 13 2 088 2 308 Other intangible assets 12 793 829 Shares in joint arrangements and assosiated companies 32 313 - Available-for-sale shares 17 132 140 Other non-current assets 18 100 155 Total non-current assets 5 903 6 087

Current assets Inventories 8 3 264 2 944 Receivables 19 3 284 2 996 Construction contracts in progress, asset 20 3 183 1 963 Derivatives 21A 215 173 Cash and cash equivalents 22 4 424 3 272 Total current assets 14 370 11 348 Total assets 20 273 17 435

Equity, liabilities and provisions Equity Issues capital 982 982 Other reserves (604) (94) Retained earnings 5 875 5 761 Equity attributable to owners of the parent 6 253 6 649 Non-controlling interests 29 8 Total equity 23 6 282 6 657

Non-current liabilities and provisions Long-term interest-bearing loans 21D 873 811 Pension liabilities 10 915 757 Derivatives 21A 1 8 Provisions 24 153 116 Deferred tax liability 15 934 1 001 Other non-current liabilities 19 56 Total non-current liabilities and provisions 2 895 2 749

Current liabilities and provisions Construction contracts in progress, liability 20 3 590 2 548 Derivatives 21A 2 732 312 Provisions 24 825 953 Short-term interest-bearing loans - 526 Other current liabilities 25 3 949 3 690 Total current liabilities and provisions 11 096 8 029 Total liabilities and provisions 13 991 10 778

Total equity, liability and provisions 20 273 17 435

Kongsberg 20 March 2015

Finn Jebsen, Chairman Anne-Lise Aukner, Deputy chairman Irene Waage Basili, Director Roar Flåthen, Director Morten Henriksen, Director

Magnar Hovde, Director Helge Lintvedt, Director Roar Marthiniussen, Director Walter Qvam, President and CEO

KONGSBERG • Annual Report and Sustainability Report 2014 27 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 1 JANUARY–31 DECEMBER Kongsberg Gruppen (Group)

Non- Equity attributable to owners of the parent controlling Total interests equity Retained Issued capital Other capital reserves earnings Total

Translation Other Available- difference, Share issued Hedge for-sale foreign MNOK Note capital capital reserve reserve exchange

Equity at 1 January 2013 150 832 191 16 (85) 5 159 6 263 11 6 274 Profit for the year 1 228 1 228 (3) 1 225 Statement of comprehensive income (332) (7) 123 (172) (388) (388) Trading in treasury shares 23 - - (3) (3) - (3) Dividends paid (450) (450) (450) Purchase/sale, non-controlling interests Dividends, non-controlling interests (1) (1) (1) (2) Translation differences, non-­ controlling interests - 1 1 Equity at 31 December 2013 150 832 (141) 9 38 5 761 6 649 8 6 657

Equity at 1 January 2014 150 832 (141) 9 38 5 761 6 649 8 6 657 Profit for the year 873 873 7 880 Statement of comprehensive income (813) (6) 309 (129) (639) (639) Trading in treasury shares 10 10 10 Dividends paid 23 (630) (630) (630) Purchase/sale, non-controlling interests (10) (10) 10 - Dividends, non-controlling interests - (1) (1) Translation differences, non-­ controlling interests - 5 5 Equity at 31 Decemner 2014 150 832 (954) 3 347 5 875 6 253 29 6 282

28 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

CONSOLIDATED STATEMENT OF CASH FLOWS 1 JANUARY–31 DECEMBER Kongsberg Gruppen (Group)

MNOK Note 2014 2013

Profit for the year 880 1 225 Depreciation on property, plant and equipment 11 342 345 Amortisation of intangible assets 12 140 138 Impairment losses 12, 13 320 - Net finance expense 14 (27) 15 Income tax expense 15 405 419 Operating profit before depreciation and amortisation 2 060 2 142

Adjusted for Changes in construction contracts in progress, asset (1 011) 259 Changes in construction contracts in progress, liability 1 042 225 Changes in other current liabilities 986 (743) Changes in inventories (321) 523 Changes in receivables (202) (233) Changes in provisions and other accruals (109) 91 Income tax paid (130) (281) Net cash flows from operating activities 2 315 1 983

Cash flows from investing activities Proceeds from property, plant and equipment 11 14 10 Purchase of property, plant and equipment 11 (339) (356) Capitalised in-house developed intangible assets (R&D) 12 (102) (80) Purchase of intangible assets 12 (2) (3) Net payment from acquisition of subsidiaries - (343) Net payment from sale of property shares 7 264 - Net payment of loans and buying/selling shares 17 (46) (3) Net cash flows used in investing activities (211) (775)

Cash flows from financing activities Payment of loans 21D (457) - Interest received 87 44 Interest paid (44) (55) Transactions with treasury shares (7) (17) Transactions with non-controlling interests (1) (2) Dividends paid 23 (628) (450) Net cash flows used in financing activities (1 050) (480)

Total cash flows 1 054 728

Effect of changes in exchange rates on cash and cash equivalents 98 35

Net change in cash and cash equivalents 1 152 763 Cash and cash equivalents at 1 January 3 272 2 509 Cash and cash equivalents at 31 December 22 4 424 3 272

KONGSBERG • Annual Report and Sustainability Report 2014 29 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

NOTES Kongsberg Gruppen (Group)

1 General information

Kongsberg Gruppen ASA is a public limited liability company The consolidated financial statements for 2014 include the headquartered in Kongsberg, Norway. The company’s shares are parent company and subsidiaries (collectively referred to as traded on the Oslo Stock Exchange. The Board of Directors “KONGSBERG” or “the Group”), as well as the Group’s investments approved Kongsberg Gruppen’s consolidated financial statements in associates and jointly controlled entities. for the accounting year 2014 at its meeting on 20 March 2015.

2 Basis for the preparation of the consolidated financial statements

The financial statements are presented in Norwegian kroner (NOK), • Estimates related to impairment on trade receivables, cf. Note 19 and all figures have been rounded off to the nearest million, unless “Accounts receivable” otherwise specified. • Estimates related to impairment losses on the carrying amount of The consolidated financial statements have been prepared in construction contracts, cf. Note 20 “Construction contracts in accordance with International Financial Reporting Standards (IFRS) progress” as adopted by the European Union (EU) and their interpretations, as • Estimates related to future warranty commitments and other well as the Norwegian disclosure requirements pursuant to the provisions, cf. Note 24 “Provisions” Accounting Act applicable at 31 December 2014. • Financial instruments, including hedge accounting (fair value or The consolidated financial statements have been prepared on cash flow hedges), cf. Note 3 J “Summary of significant account- a historical cost basis except for the following assets and liabilities: ing policies – Financial instruments” and Note 21 “Financial • Financial derivatives (forward exchange contracts and interest instruments” swap agreements), measured at fair value • Sale and leaseback related to property, assessment of operating • Financial available-for-sale assets, measured at fair value versus financial leases, cf. Note 3 H “Summary of significant accounting policies – Leases, Sale and leaseback” and Note 27 Significant accounting judgements, estimates and assumptions “Sale and leaseback”. During the preparation of the financial statements, the company’s management has applied its best estimates and assumptions considered to be realistic based on experience and market condi- tions. The estimates are reviewed on an ongoing basis. Situations can arise which alter the estimates and assumptions, which will affect the company’s assets, liabilities, revenues and expenses. Changes in estimates are recognised in the period in which they occur. In the preparation of the financial statements, management has made some significant judgements relating to the application of accounting policies. For more detailed information about estimate uncertainty and areas for application of judgement that could have a significant impact on the amounts recognised in the following financial year, please see the following notes: • Revenue recognition, estimates of progress and contract profit in connection with construction contracts, cf. Note 3 C “Summary of significant accounting policies – Revenue recognition” and Note 20 “Construction contracts in progress” • Estimates of whether internally financed development will generate future financial benefits, cf. Note 3 F “Summary of significant accounting policies – Intangible assets” and Note 12 “Intangible assets” • Estimates related to pension liabilities, cf. Note 10 “Pensions” • Impairment tests of goodwill, including the calculation of recoverable amounts from cash-generating units, cf. Note 13 “Impairment test of goodwill”

30 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

3 Summary of significant accounting policies

A) Basis of consolidation Elimination of transactions Subsidiaries All intra-group purchases, sales, balances and unrealised gains and Subsidiaries are all entities over which the Group has control. losses between Group entities are eliminated in full. Unrealised loss- The Group controls an entity when the Group is exposed to, or has es are eliminated correspondingly, unless they are related to impair- rights to, variable returns from its involvement with the entity and ment requiring recognition in the consolidated financial statements. has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which Non-controlling interests control is transferred to the Group. They are deconsolidated from Non-controlling interests are included in the Group’s equity as a the date that control ceases. separate line item. Its portion of the result is included in the profit On initial recognition, subsidiaries are measured at their fair value for the year. Non-controlling interests include the portion of the fair on the date of acquisition. Fair value is allocated to the identified value of the subsidiary, including its share of identified excess value assets, liabilities and contingent liabilities. The unallocated purchase on the date of acquisition. The portion of the total comprehensive price is classified as goodwill. New subsidiaries’ income statement, income is attributed to the non-controlling interest even if that assets and liabilities are included in the consolidated financial state- results in a negative balance. ments from the date of acquisition. The date of acquisition is the date when KONGSBERG obtains control of the acquired company. B) Foreign currency Normally, control will be achieved when all the terms of the agree- The Group’s consolidated financial statements are presented in NOK ment are satisfied. Examples of contingencies can be the approval (Norwegian kroner), which is also the parent company’s functional of the Board of Directors, the General Meeting or the competition currency. Each entity in the Group determines its own functional authorities. For business combinations achieved in stages, the currency, and all transactions in the accounts of the individual en­ financial statements are based on the values at the time when the tities are measured at that functional currency. Upon initial recogni- Group obtained control. Goodwill is calculated at the date control tion, foreign currency transactions are measured in the functional is obtained. On each individual acquisition, it is decided whether currency on the date of the transaction. Construction contracts are goodwill should be limited to KONGSBERG’s proportionate share hedged and recognised on the basis of the hedged exchange rate or to include non-controlling interests. Entities that constitute the (project hedges). Trade receivables, other receivables, accounts Group are listed in Note 31 “List of Group Companies”. payable and other liabilities in foreign currencies are translated at Contingent considerations to be disbursed at a later date when the exchange rate at the balance sheet date, and currency differ- certain conditions of the acquisition are met, are recognised at fair ences are recognised in the income statement. Differences that value on the date of the acquisition. Subsequent changes in the fair arise at the translation of cash flow hedges and meet the criteria value of contingent consideration classified as an asset or liability for hedge accounting, are recognised as a change in fair value on are recognised according to IAS 39 either in the income statement. cash flow hedges in the statement of comprehensive income (OCI). Transaction costs incurred in connection with the business The effect is reflected in the income statement upon realisation of combination are recognised as expenses on an ongoing basis. the cash flow hedges. (See also 3J “Financial instruments”). Gains and losses related to foreign exchange items in the normal Joint ventures operating cycle are included in operating profit before depreciation Shares in companies where KONGSBERG, together with other and amortisation. Other gains and losses related to balances in parties, has a controlling interest (joint ventures), are valued accord- foreign currencies are classified as finance income or expenses. ing to the equity method. This applies to companies where the Group has entered into an agreement with another party to operate Translation – foreign subsidiaries and develop a joint venture where none of the parties have Assets and liabilities in foreign operations applying functional independent control. currencies other than NOK are translated into NOK at the rate of exchange prevailing at the balance sheet date. Revenues Associates and expenses in foreign currencies are translated into NOK at the Associates are entities in which the Group has significant influence, average exchange rates on a monthly basis. The translation differ- but not control over financial and operating policies (typically a ences are recognised in the statement of other comprehensive stake from 20 to 50 per cent). Significant influence is the power income. When a foreign entity is disposed of with the result that to participate in the financial and operating policy decisions of the KONGSBERG no longer has control, the accumulated translation company, but where KONGSBERG does not have control or joint differences are recognised in the income statement and reversed control over those policies. Where the stake is less than 20 per at the same time in other comprehensive income. Translation differ- cent, it must be clearly demonstrated that significant influence ences are not recognised in the income statement in connection exists, for example, through shareholder agreements. The consoli- with partial disposals of subsidiaries, provided that the Group has dated financial statements include the Group’s percentage of the continued control. profit/loss from associates using the equity method of accounting from the date on which significant influence is achieved and until C) Revenue recognition such influence ceases. When the Group’s percentage of a loss In connection with revenue recognition, KONGSBERG distinguishes exceeds the value of the investment, the carrying amount of the between construction contracts/system deliveries, goods/standard investment is reduced to zero and no further losses are recognised. production/services and license sales with related services. The exceptions are cases in which the Group has an obligation to cover the losses.

KONGSBERG • Annual Report and Sustainability Report 2014 31 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Construction contracts/system deliveries and at the same stage of completion if a contract has been signed, A significant part of KONGSBERG’s operations is to develop and or in several contracts concluded with the same buyer at the same manufacture products and systems on the basis of orders received. time, and where the individual deliveries not could have been A construction contract is a contract negotiated with the view negotiated separately on the same terms. In special cases, work on to manufacture an asset or a combination of assets that are closely projects will commence and expenses incurred before a contract related or interdependent. KONGSBERG has applied the following has been signed with the customer. This requires a high probability criteria to define a construction contract: that the contract will be signed. 1. A binding contract negotiated individually which takes a customer’s special requirements into account Goods/standard production/services 2. Construction based on the customer’s specifications which entail The ordinary sale of goods and standard production not covered by individual design and/or development a construction contract are usually recognised on an accrual basis, 3. The contract is enforceable, and cancellation will require the which is usually upon delivery. Delivery is considered complete when customer at a minimum to cover the expenses incurred in the control and risk for the delivered goods are transferred to the connection with the construction customer. 4. The production takes place over several accounting periods In addition to assuming the control and risk, it must be probable 5. The various elements/components/services in the contract that the consideration can be collected, and that the revenue can cannot be sold separately be measured reliably. Contracts that do not meet the definition of a construction contract The amount recognised is measured as the fair value of the are recognised at the time of delivery. consideration or receivable. Services that are delivered, but not part Recognition of project revenues and expected contract profit is of a construction contract or licensed sales, are recognised as calculated according to the individual project’s percentage of revenue incrementally as the service is provided. com­­pletion. The percentage of completion is normally determined on the basis of costs incurred compared to total expected costs or Licence revenues incurred hours measured against the total expected time consump- The Group also sells licenses for the use of software systems. tion. In some cases, other progress measures can be used if this License revenues are normally recognised on a systematic manner provides a better estimate of the actual progress and value added on an accrual basis, which is usually when the system is delivered to in the project. the customer. The date of delivery is defined as the date on which The accumulated value of contracts in progress is included in the control and risk are transferred to the customer. revenues. In the statement of financial position, accumulated value If the sale of the license depends on customer acceptance, not invoiced is reported as “Construction contracts in progress, license revenues will not be recognised until the customer has assets”. Accumulated value is based on the percentage of comple- ac­­cepted. In cases that involve adaptations or additional work, the tion and determined as incurred production costs in addition to a total contract amount, including consideration for the licenses, is proportion of earned contract profit. Produc­tion costs include direct recognised as revenue at the same stage of completion as deliveries. wages, direct materials and a proportionate share of indirect costs, Maintenance and service/support are recognised as revenue distributable to the contracts. General development costs, sales incrementally as the service is performed or on a straight-line basis costs and common administrative costs are not included in during the period in which the service is performed. production costs. Recognised accrued contract profit shall not exceed a propor- Combined deliveries of goods, services and licence sales tional share of the estimated total contract profit. If the profit on a The recognition criteria are applied separately for each transaction. contract cannot be estimated reliably, the project will be recognised In case of combined deliveries with different recognition criteria, the without a profit until reliable estimates are available. When it is various elements are identified and recognised as revenue separat­e­ prob­able that total contract costs will exceed total contract ly. Regarding the sale of goods with accompanying maintenance revenue, the expected loss is recognised immediately. A construc- services, the goods are recognised as revenue upon delivery, while tion contract is expected to result in a loss when expected costs the maintenance services are recognised as revenue over the period exceed expected revenues in the contract. in which the services are performed. The carrying value of construction contracts in the statement of When market prices can be obtained for the various elements to financial position is based on an assessment of the financial status be delivered, the revenue is based on these prices, and the stipulat­ of each individual contract. The classification is determined on a ed price of the license will be recognised upon delivery. For service contract-to-contract basis unless netting has been agreed. If this is and maintenance, the stipulated price of the service will be deferred the case, the contracts can be considered together. In the consoli- and recognised on a straight-line basis over the period in which dated financial statement, all balances are netted for each construc- service and maintenance are performed. tion contract and presented on one line in the statement of financial Upon the sale of different elements where no market prices can position. Each contract is presented as either “Construction con- be obtained, KONGSBERG has the following principles for recogni- tracts in progress, asset” or as “Construction contracts in progress, tion and measurement of revenue: liability”. Accounts receivable related to construction contracts are • Identification of the various elements for delivery, e.g., license, netted against balance sheet items to the extent that the construc- service, maintenance and consultancy services tion contract has recorded prepayments (billing exceeds accumulat­ • Expected costs are estimated for each element in the contract. ed revenue), with the consequence that the balance items only A reasonable profit margin is also estimated on the various contain actual advances received. elements, and the assumptions for the estimation must be Additional contractual services and estimated additional costs are consistent from one period to the next included in the original project costs estimate and recognised in line • The estimated cost plus the profit margin constitutes deferred with the overall project. Construction contracts that involve one or revenue and is recognised on a straight-line basis throughout the several similar deliveries are recognised with joint contract profit period in which the services are performed

32 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

• The contract amount, less estimated revenue from the value using a discount rate before tax that reflects the market’s abovementioned elements, is estimated as license revenue and target for a return on investments for the cash-generating unit in recognised upon delivery. question. If the value in use of the cash-generating unit is less than the carrying amount, impairment reduces the carrying value of D) Taxes goodwill and then the carrying value of the unit’s other assets on Income tax expense in the financial statements includes tax payable a pro rata basis, based on the carrying value of the individual assets. and the change in deferred tax for the period. Assets and liabilities Impairment on goodwill is not reversed in a subsequent reporting associated with deferred tax are calculated using the liability period even if the recoverable amount of the cash-generating unit method. Deferred tax is calculated on net tax-increasing temporary increases. Any impairment will be recognised through profit and loss differences between the values used for accounting purposes and in the financial statements. Impairment testing of goodwill is those used for taxation purposes, adjusted for deductible temporary described in Note 13 “Impairment test of goodwill “, cf. also tax-reducing differences and tax losses carried forward if this 3 I “Summary of significant accounting policies – Impairment of satisfies the requirements in IAS 12.71. non-­financial assets”. Revenue from long-term construction contracts is not recognis­ ed for tax purposes until the control and risk have been transferred Development to the customer, and KONGSBERG is entiteled to complete pay- Costs related to development activities, including projects in the ment. Due to KONGSBERG’s volume of large, long-term contracts, development phase, are recognised in the statement of financial there are considerable temporary differences. position if the development activities or project meet the defined Deferred tax assets are only recognised to the extent that it is criteria for capitalisation. Development comprises activities related probable that taxable profit will be available against which the to planning or designing the manufacturing of new or significantly deductible temporary differences can be utilised. Deferred tax improved materials, devices, products, processes, systems or assets are assessed for each period and will be reversed if it is no services before being placed in commercial production or use. When longer probable that the deferred tax asset will be utilised. assessing whether a project constitutes the development of a new system, functionality or module, the object being developed must E) Finance income and finance expenses be able to operate independently of existing systems/products that Finance income comprises interest income, dividends, foreign are sold. KONGSBERG has considered the criteria for significant currency gains, and gains on disposals of “available-for-sale shares” improvements to be an increase of more than 20 per cent in value where the changes in value are recognised as other income and from before being developed or in relation to the replacement cost expenses in other comprehensive income. Interest income is of the system. The capitalisation of development costs requires that recognised as it accrues using the effective interest method, while those costs can be reliably measured, that the product or process is dividends are recognised on the date when the Annual General tech­nically and commercially feasible, that future financial benefit Meeting approves it. is probable and that KONGSBERG intends to and has sufficient Finance expenses comprise interest expense, foreign currency resources to complete the development, and to use or sell the losses, impairments on “available-for-sale shares” and losses on asset. Other development costs are expensed as they are incurred. sales of assets available for sale where changes in value are When the criteria for balance sheet recognition are met, accrued recognised directly in other comprehensive income (OCI). Interest costs are recognised in the balance sheet. Costs include raw expenses are recognised as they accrue using the effective interest materials, direct payroll expenses and a portion of indirect costs that method. are directly attributable to the development. Capitalised development costs are recognised at cost less ac­ F) Intangible assets cumulated amortisation and impairment losses in the statement of Goodwill financial position. Amortisation is based on the expected useful life. Goodwill arises at the acquisition of a business (business combina- The main rule is straight-line amortisations, but total production tion) and is not depreciated. Goodwill is recognised in the statement units can also be used in special cases. The remaining expected of financial position at acquisition cost less any accumulated impair- useful life and expected residual value are reviewed annually. ment losses. Goodwill does not generate cash flows independent The calculation of financial benefits is based on the same of other assets or groups of assets, and is allocated to the cash-­ principles and methods as for the impairment testing. The calcula- generating units that are expected to gain financial benefits from tion is based on long-term budgets approved by the Board. Note 13 the synergies that arise from the business combination from which “Impairment testing” has more details on the calculation. the goodwill is derived. Cash-generating units that are allocated Assessments of the fulfilment of the criteria for capitalising goodwill are tested for impairment annually at the end of the year, development costs are made on an ongoing basis throughout the or more frequently if there is any indication of impairment. completion of the development projects. Based on technical Goodwill is tested for impairment by estimating the recoverable success and market assessments, a decision whether to complete amount for the individual cash-generating unit or group of cash- development and start capitalisation is made during the develop- generating units that are allocated goodwill and followed up by ment phase. management. The group of cash generating units is nevertheless not larger than an operating segment as defined by IFRS 8 Maintenance Operating segments. Maintenance is the work that must be performed on products or Impairment is calculated by comparing the recoverable amount systems to secure their expected useful life. If a significant improve- with the individual cash-generating unit’s carrying amount. The ment is made on the product or system that could result in a recoverable amount is the higher of value in use or net realisable prolonged life cycle, or if the customer is willing to pay more for the value. The Group uses the value in use to determine the recoverable improvement, this is to be considered as development. Costs related amount of the cash-generating units. In determining the value in to maintenance are expensed as incurred. use, the expected future cash flows are discounted to net present

KONGSBERG • Annual Report and Sustainability Report 2014 33 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Technology and other intangible assets does not generate independent cash inflows, the asset is grouped Technology and other purchased intangible assets with determined with other assets that generate independent cash inflows. useful lives are measured at cost less accumulated amortisation and Non-financial assets subject to impairment losses are reviewed accumulated impairment losses. during each period to determine whether there are indications that The amortisation is determined on the expected useful life based the impairment loss has been reduced or no longer exists. Reversals on total production units or number of years. The expected useful of previous impairment are limited to the carrying value the asset life and the determination of the amortisation rate are reviewed would have had after depreciation and amortisation, if no impair- during each period. ment loss had been recognised.

G) Property, plant and equipment J) Financial instruments Property, plant and equipment are recognised at acquisition cost, Financial assets and liabilities net of accumulated depreciation and/or any accumulated impair- Financial assets and liabilities consist of derivatives, investments ment losses. Such cost includes expenses that are directly in shares, accounts receivable and other receivables, cash and cash attributable to the acquisition of the assets. Property, plant and equivalents, other financial liabilities, accounts payable and other equipment are depreciated on a straight-line basis over their liabilities. A financial instrument is recognised when the Group be- expected useful life. When individual parts of a property, a plant comes party to the instrument’s contractual provisions. Upon initial or equipment have different useful lives, and the cost is significant recognition, financial assets and liabilities are assessed at fair value in relation to total cost, these are depreciated separately. Any plus directly attributable expenses. The exception is financial instru- expected residual value is taken into account when stipulating the ments, where changes in fair value are recognised through profit depreciation schedule. and loss, and directly attributable costs are expensed. An ordinary The remaining expected useful life and expected residual value purchase or sale of financial assets is recognised and derecognised are reviewed annually. Gains or losses on the disposal of property, from the time an agreement is signed. Financial assets are derecog- plant and equipment are the difference between the sales price and nised when the Group’s contractual rights to receive cash flows the carrying amount of the unit, and recognised net as other from the assets expire, or when the Group transfers the asset to income in profit and loss. Expenses incurred after the asset is in use, another party and transfers all risks and rewards associated with e.g., day- to-day maintenance, are expensed as they are incurred. the asset. Financial liabilities are derecognised when the Group’s Other expenses expected to result in future economic benefits and contractual obligation has been satisfied, discharged or cancelled. that can be reliably measured, are capitalised. Classification H) Leases, sale and leaseback The Group classifies assets and liabilities upon initial recognition Leases or sales with leaseback where KONGSBERG generally takes based on the type of instrument and the intended purpose of the over all risk and all benefits related to ownership, are classified as instrument. The Group classifies financial assets in the following financial leases. On initial recognition, the asset is measured at the categories: lower of fair value and net present value of the agreed minimum i. fair value through profit and loss rent. After initial recognition, the same accounting policies are used ii. loans and receivables as for the corresponding asset. iii. available-for-sale financial assets Other leases are operating leasing agreements and not recognis­ iv. financial liabilities ed in the Group’s balance sheet. KONGSBERG’s sale and leaseback Financial derivatives are included in the category “fair value through agreements are considered to satisfy the criteria for operating leas- profit and loss”, also if the derivative has a negative value. ing agreements. When a sale and leaseback agreement is defined as Receivables and liabilities related to operations are measured at an onerous contract, the present value of the expected loss is their amortised cost, which in practice implies their nominal value recognised. and provision for expected losses. Except for investments in subsidiaries, joint ventures or associ- I) Impairment of non-financial assets ates in the statement of financial position at the date of the balance All non-financial assets are reviewed for each reporting period to sheet, all shares are defined as financial instruments available for determine whether there are any indications of impairment. If this is sale. Available-for-sale financial assets are measured at fair value at the case, recoverable amounts are calculated. the balance sheet date. Changes in the value of available-for-sale The recoverable amount of an asset or cash-generating unit is financial assets are recognised in other comprehensive income the higher of its value in use or fair value less net costs to sell. Value (OCI), except for impairments, which are recognised through profit in use is calculated as the net present value of future cash flows. and loss. Note 4 “Fair value” has a more detailed description of how The calculation of net present value is based on a discount rate fair value is measured for financial assets and liabilities. before tax and reflects current market assessments of the time The company’s financial liabilities are recognised at amortised value of money and the risks specific to the asset. The pre-tax cost, except for financial derivatives, which are recognised at fair discount rate has been calculated using an iterative method. value through profit and loss. Impairment is recognised if the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. A cash- Impairments on financial assets generating unit is the smallest identifiable group that generates a When there is objective evidence that a financial asset’s value is cash inflow that is largely independent of other assets or groups. lower than its cost, the asset shall be written down through profit Impairment related to cash-generating units primarily reduces the and loss. Impairment in the value of assets measured at amortised carrying amount of any goodwill allocated to the unit and then the cost is calculated as the difference between the carrying amount carrying amount of the other assets in the unit on a pro rata basis. and the net present value of the estimated future cash flow These assets normally constitute property, plant and equipment, discounted at the original effective interest rate. Available-for-sale and other intangible assets. In the event that an individual asset assets are impaired when their present fair value is lower than

34 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

acquisition cost, and the impairment is considered to be significant instrument is amortised during the remaining period up to maturity and not temporary. Ordinarily, KONGSBERG would assume that of the hedged item. an impairment of more than 20 per cent of the cost is significant and is not of a temporary nature. If the asset has been written (ii) Cash flow hedges (prognosis hedges) down through profit and loss, it is the impaired value that shall be By hedging highly probable future cash flows, the effective part the basis for the assessment. of the change in fair value of the hedge instrument is recognised in Accumulated losses recognised in other comprehensive­ income other comprehensive income for the period. shall be transferred to profit and loss at the time of impairment. When a hedged transaction occurs, the accumulated change in In cases of a significant increase in the value of the asset, which is value of the hedging instrument is transferred from other compre- not temporary, the impairment will be reversed. For financial assets hensive income and taken through profit and loss. measured at amortised cost, any reversal is recognised through If hedging a highly probable forecast transaction subsequently profit and loss. If financial assets that are investments in equity in- leads to the recognition of an asset or liability, the associated gain struments are reversed, the change in value is recognised in other or loss is reclassified from other comprehensive income to profit comprehensive income (OCI). and loss during the same period(s) in which the asset or liability af- fects profit or loss, e.g., over the period of depreciation for an asset. Derivatives In connection with hedges where the future transaction Derivatives in KONGSBERG comprise forward exchange contracts becomes a construction contract, the hedges are allocated and interest swap agreements. Upon initial recognition, derivatives to contracts at the signing and, if required, rolled from cash flow are measured at fair value, and identifiable transaction costs are (prognosis) hedging to fair value (project) hedging. Gains and losses recognised through profit and loss as incurred. Changes in the fair are recognised in line with the contract`s percentage of completion, value of derivatives are recognised through profit and loss, unless implying that construction contracts that are hedged before signing they qualify for hedge accounting. are recognised at the originally hedged exchange rate. At cash flow hedging of financial obligations, the change in value Hedging is transferred from other comprehensive income (OCI) to profit and KONGSBERG has as policy to limit currency risks, while taking a loss over the term of the liability. pro-active attitude to the importance of a currency as a competi- If a hedging instrument expires without having been rolled for- tive parameter. KONGSBERG’s policy is to hedge all contractual ward or if the hedge relationship is discontinued, the accumulated foreign currency cash flows (project hedges). Additionally, parts of gains and losses are recognised directly through profit and loss future projected currency cash flows are hedged in accordance when the hedged transaction takes place. In the event that the with an established strategy (prognosis hedges). KONGSBERG has hedged transaction is no longer expected to occur, the accumulated hedged parts of its obligations (interest rate hedges). unrealised gains or losses on the hedge instrument previously Before the initial recognition of the hedge transaction, recognised in other comprehensive income (OCI) are transferred KONGSBERG determines whether a derivative (or another financial to profit and loss. instrument) should be used to: i. hedge the fair value of a firm commitment not recognised iii) Interest hedging (fair value/project hedges) KONGSBERG also hedges parts of its liabilities with interest swap ii. hedge a future cash flow of a recognised asset or liability, or an agreements (loan hedging). Both interest swap agreements from identified highly probable future transaction (cash flow hedges/ fixed to floating interest (fair value hedging) and from floating to prognosis hedges) fixed interest (cash flow hedging) have been entered into. Reference is made to Note 21 “Financial instruments” for further (i) Fair value hedges (project hedges) information. The change in fair value of fair value hedges are recognised against the hedged items. For currency hedges of future contractual trans- Follow-up of hedging effectiveness actions, this implies that the changes in value of the future transac- The forward exchange contracts are expected to be effective tion due to changes in the foreign exchange rate are recognised in throughout the entire period. KONGSBERG rolls forward exchange the statement of financial position. For construction contracts, this contracts from prognosis to project hedging upon signing the implies that the part of the contract that is accrued in practice is contracts. In addition, forward exchange contracts (project hedges) recognised at the hedged exchange rate / project rate, while the are rolled forward in cases where receipts/ payments occur later part of the contract that is not accrued, is recognised as gain or than originally anticipated. At shorter time differences between the loss at changes in the foreign exchange rate. Since the hedge maturity of the forward contracts and the receipts/ payments, instrument is also recognised at fair value, this entails symmetrical KONGSBERG uses bank accounts in foreign currency. As a result, recognition of the hedged item and the hedge instrument. Overall the exchange of foreign currency from the foreign currency bank this means that construction contracts are recognised at the account takes place in the same period as the final maturity of the hedged exchange rate. forward contract or the receipts/ payments. Hedging effectiveness Hedge accounting is ended in the event that: will therefore be very high throughout the entire period. a) the hedging instrument expires, or is terminated, exercised or sold, K) Classification b) the hedge no longer satisfies the above-mentioned hedge Assets related to normal operating cycles for goods/services or are accounting criteria, or due within 12 months are classified as current assets. Other assets c) the Group decides to discontinue hedge accounting for other are classified as non-current. Correspondingly, liabilities related to reasons. normal operating cycles for goods/services or are due within 12 In connection with fair value hedges of financial assets or liabilities months are classified as current liabilities. Other liabilities are recognised at amortised cost, the change in the value of the hedge classified as non-current.

KONGSBERG • Annual Report and Sustainability Report 2014 35 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

L) Inventories against their probability. When historical information is not available, Inventories are measured at the lower of acquisition cost and net other sources are used to estimate the provisions. If the time value realisable value. For raw materials and work in progress, net realis- is material, provisions are determined at the net present value of the able value is calculated as the estimated selling price in ordinary liability. operations of finished products less remaining production costs and the costs of the sale. For finished goods, net realisable value is the Warranty provisions estimated selling price in ordinary operations less estimated costs Provisions for warranty costs are recognised at the delivery of of completion of the sale. For work in progress and finished prod- the underlying products or services. The provisions are based on ucts, the acquisition cost is calculated as direct and indirect costs. historical data on warranties when available, and on a weighting Inventories are valued based on the average acquisition cost. of possible outcomes against the probability that they will occur. Warranty costs are expensed concurrently with the percentage of M) Receivables completion of the projects, and reclassified as provisions for Trade receivables and other receivables are financial assets with warranty upon delivery. fixed or determinable payments that are not quoted in an active market. Such financial assets are measured at amortised cost using Restructuring the effective interest method, but due to the brief term to maturity, Provisions for restructuring are recognised when the Group has accounts receivable and other receivables will in practice be approved a detailed, formal restructuring plan, and restructuring has recognised at their nominal values less impairment. Accounts either started or been announced publicly among the parties receivable in foreign currencies are recognised at the exchange involved. rates at the balance sheet date. Onerous contracts N) Cash and short-term deposits Provisions for onerous contracts are recognised when Cash and short-term deposits in the statement of financial position KONGSBERG’s expected revenues from a contract are lower than comprise, bank deposits and short-term liquid investments that can the unavoidable expenses of meeting the obligations under the be immediately converted into a given sum of money, with a contract. maturity of three months or less. Q) Employee benefits O) Equity Defined contribution pension plans i. Treasury shares The Group introduced a defined contribution pension plan for all When treasury shares are reacquired, the cost including direct employees in Norway under the age of 52 as of 1 January 2008. attributable costs is recognised as changes in equity. Treasury Employees with defined benefit plans, aged 52 and older at the time shares are presented as a reduction in equity. Any gain or loss on of the transition, stayed with that plan. Most of KONGSBERG’s treasury share transactions is not recognised in profit and loss. companies abroad have defined contribution pension plans. The contribution is expensed as it accrues and is shown as payroll ii. Costs related to equity transactions expenses in the income statement. Transaction costs directly related to an equity transaction and the tax effect on the equity transaction are recognised directly in equity Defined benefit pension plans net of tax. Pension benefits depend on the number of years of service and salary level when reaching retirement age. There are also early iii. Hedge reserves retirement plans for some executives. To ensure a uniform calcula- Hedge reserves include accumulated net changes in fair value for tion of KONGSBERG’s pension liabilities, all cor­­porate entities have financial instruments used as cash flow hedges (prognosis hedges used the same actuary for the calculations. In the income state- and interest hedging from floating to fixed interest), which are ment, the year’s net pension expenses, after a deduction for the recognised in other comprehensive income on an ongoing basis. expected return on pension plan assets, have been recognised as “personnel expenses”. The statement of financial­ position shows iv. Available-for-sale reserve net pension liabilities including social security con­tributions. The Shares at fair value include the total accumulated net changes in financial and actuarial assumptions are subject to annual review. The the fair value of financial instruments classified as available for sale. discount rate is stipulated on the basis of the covered bond interest rate, plus a supplement that reflects the duration of the pension v. Foreign currency translation differences liability. Risk coverage is described in Note 10 “Pension”. Actuarial Foreign currency translation differences are recognised in other gains or losses related to changes in the basis data, estimates and comprehensive income. Upon the disposal of all or part of a foreign changes in assumptions are recognised in other comprehensive entity resulting in discontinued control, the ac­cumulated translation income (OCI). The Group’s legal liability is not affected by the differences are recognised in other comprehensive income, including treatment of pensions for accounting purposes. the accompanying reversal (cf. also Note 3 B “Summary of significant accounting policies – Foreign currency”). Share transactions with employees For a number of years, the Group has been conducting a share P) Provisions program for all employees, i.e. offering shares at a discounted price. Provisions are recognised when the Group has an obligation as a Discounts on shares are recognised as payroll expenses. result of a past event, and when it is probable that there will be a financial settlement as a result of this obligation and the amount can be reliably measured. If possible, the provision should be estimated on the basis of historical data and a weighting of results

36 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Compensation to employees as selling shareholders in issued in July 2014. It replaces the guidance in IAS 39. The standard connection with acquisitions is effective for accounting periods beginning on or after 1 January When enterprises are acquired, the compensation to selling 2018. Early adoption is permitted. The Group has yet to assess IFRS shareholders that are also employed in the acquired company shall 9’s full impact and has also not made a decision on potential early be recognised as salary if one of the conditions for the payment is application. to maintain the employment. In such instances, the compensation shall be accrued as a salary expense over the required period. IFRS 15 Revenue from contracts with customers IFRS 15 deals with revenue recognition. The standard requires that R) Earnings per share the customer contracts are divided into individual performance The Group presents ordinary earnings per share and diluted earn- obligations. A performance obligation may be a good or a service. ings per share. Ordinary earnings per share are calculated as the Revenue is recognised when a customer obtains control of a good ratio of net profit/(loss) attributable to the ordinary shareholders or service and thus has the ability to direct the use and obtain the and the weighted average number of ordinary shares outstanding. benefits from the good or service. The standard replaces IAS 18 The diluted earnings per share is the profit attributable to the Revenue and IAS 11 Construction contracts and related interpreta- ordinary shareholders, and the weighted number of shares tions. The standard is effective for annual periods beginning on or outstanding, adjusted for all diluting effects related to share options. after 1 January 2017 and earlier application is permitted. The Group is assessing the impact of IFRS 15. S) Changed standards in IFRS and interpretations in IFRIC that have not yet been implemented There are no other IFRSs or IFRIC interpretations that are not Standards and interpretations that are issued up to the date of yet effective that would be expected to have a material impact on the issuance of the consolidated financial statements, but not yet the Group. effective, are disclosed below. The Group’s intention is to adopt the relevant new and amended standards and interpretations when they become effective, subject to EU approval, before the consolidated financial statements are issued.

IFRS 9 Financial instruments IFRS 9, Financial instruments, addresses the classification, measure­ ment and recognition of financial assets and financial liabilities, as well as hedge accounting. The complete version of IFRS 9 was

4 Fair value

KONGSBERG’s consolidated accounting principles and disclosures Inventories require the measurement of fair value on certain financial and The fair value of inventories acquired through acquisitions is based non-financial assets and liabilities. For both measurement and on an estimated selling price for ordinary operations less selling disclosure purposes, fair value has been estimated as described in costs and a reasonable profit for the sales efforts. the disclosures below. Where relevant, further disclosures will be provided in the notes about the assumptions used to calculate fair Investments in equity instruments value on the individual assets and liabilities. The fair value of available-for-sale financial assets is measured at the quoted price on the balance sheet date. Listed shares consist Intangible assets either of those listed on the Oslo Stock Exchange or on the The fair value of intangible assets, e.g., technology, software and Norwegian Securities Dealers Association’s OTC list. For unlisted customer relations acquired through acquisitions, is calculated at investments, the most recent price of a share transaction or share the net present value of the estimated future cash flow from the issue will be used to estimate fair value. When there has been no asset, discounted by a risk-adjusted discount rate. trading in shares for a longer period of time, it will be considered Brand names are calculated at the net present value of the whether the last quoted price provides a correct picture of the fair estimated savings of royalty costs by using the brand name. value. The alternative is to use the last traded share price and adjust The fair value of customer relations is based on the discounted it for significant events during the period from the last transaction net excess earnings on the related asset. and up to the balance sheet date.

Property, plant and equipment Derivatives At acquisitions, KONGSBERG measures property, plant and equip- The fair value of forward exchange contracts is measured on ment at fair value. The fair value is equivalent to its market value. observable data. KONGSBERG uses Reuters’ prices for the foreign The market value of property is based on what the property could exchange forwards. Reuters’ prices are based on several market be sold for on the day of valuation agreed by a willing buyer and players. Where no listed price is available, fair value is calculated seller in an “arm’s length transaction”. The market value of plant and by discounting the difference between the agreed forward contract equipment is based on assessments obtained from independent price and the current forward contract for the remainder of the appraisers. contract using the risk-free interest rate based on government

KONGSBERG • Annual Report and Sustainability Report 2014 37 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

bonds. The fair values of interest swap agreements and currency flows are discounted by the market interest rate expected for options are assessed on the basis of the observed market value. comparable loans at the date of the balance sheet. The market interest rate, before the credit mark-up, is based on NIBOR, the Non-current liabilities money market interest rate. Fair value of interest-bearing loans, cf. Note 21F ”Financial instru- ments – summary Financial assets and liabilities”, is calculated by using estimates of the interest curve and KONGSBERG’s interest margin as stipulated on the balance sheet date. The estimated cash

5 Financial risk management objectives and policies

KONGSBERG has a centralised treasury department responsible for KONGSBERG is continuously considering the possibility of utilising the Group’s financing, currency risk, interest rate risk, credit risk and the international credit market. liquidity management as well as insurance schemes. The Group’s In the autumn of 2013, the Group changed its dividend policy to: subsidiaries have limited opportunities to establish independent “The dividend shall over time constitute between 40 and 50 per funding or to assume financial risk. The Board has adopted guide- cent of the company’s ordinary profit after tax. In deciding the size lines for financial risk management which have been included in the of the dividend, the expected future capital requirements will be Group’s financial policy. considered.” KONGSBERG emphasises financial flexibility, and has capital Funding and capital management structure requirements to ensure a balance between liquidity risk KONGSBERG’s operations are characterised by long-term con- and refinancing risk. Excess liquidity is placed in term deposits and tracts that may extend for several years, while the Group in all low-risk money market funds. See Note 22 “Cash and cash business areas has a long-term marketing strategy. This requires equivalents”. Loans are to be renegotiated well in advance of their reliable access to capital over time, and KONGSBERG aspires to be due date, and the average term to maturity for current loans is to considered to have good credit rating by their lenders and investors. be at least two years. The Group has satisfactory access to capital in the NOK market, KONGSBERG aims to have a diversified selection of funding and has therefore concluded that there is no need to be subject sources and a balanced maturity structure, cf. the table below. This to official rating from global credit rating companies. The Group is, implies the use of banks based on syndicated credit facilities and however, regularly rated by its lenders and has on an average the issue of debt instruments on the Norwegian capital market. been classified BBB+ in the most recently updated analyses.

Total at MNOK 31 Dec 2014 2015 2016 2017 2018 2019 2020

Interest bearing liabilities (bond loans) 750 - - 500 - 250 -

At 31 December 2014, KONGSBERG had a syndicated credit facility of MNOK 1,500 which is undrawn and is scheduled to mature in April 2019.

Due to covenants on existing loans, KONGSBERG shall have a needs may be covered by short-term loans within the framework moderate gearing ratio (net interest-bearing liabilities/EBITDA). of the syndicated credit facility. KONGSBERG has a Group bank Net interest-bearing liabilities should not exceed three times the account scheme to which basically all subsidiaries are connected. EBITDA, but can be up to 3.5 times the EBITDA for a maximum of This scheme optimises the availability and flexibility in terms of three consecutive quarters. KONGSBERG has no other financial liquidity management. The Group’s liquidity trend is routinely terms apart from the gearing ratio in its loan covenants. monitored through monthly carry-forwards of liquidity forecasts from the most material units, as well as budgets and reporting by Liquidity risk segment for major investments. At KONGSBERG, liquidity risk is understood as financial prepared- ness achieved by ensuring that the Group has financial parameters Currency risk and liquidity appropriate to its operating and investment plans at all A large share of KONGSBERG’s revenues is related to export times. The centralised treasury department bears the overall contracts, and there is a relatively small percentage of purchasing responsibility for managing the Group’s liquidity risk. The Group’s in the same currency. As a result, KONGSBERG has considerable Financial Policy specifies requirements for liquidity reserves which foreign currency exposure. The business areas identify the guarantee that the Group will always be able to meet its contractual exposure. The centralized financial function offers instruments that payment obligations. reduce currency risk. Short-term liquidity needs are normally covered by bank deposits KONGSBERG has a policy of hedging all contractual currency and the balance on the group cash pool system. Any further liquidity flows (project hedges).

38 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

According to policy, a part of anticipated new orders are also institutions to have a certain credit rating before KONGSBERG hedged (cash flow hedges). The Group ensures a higher share of can engage in financial contracts with them. expected orders further in the further at higher rates and a smaller The Group is exposed to credit risk from trade receivables, and share of expected orders with a shorter time perspective at lower the business areas are responsible for their own credit risk. These rates according to a matrix in the Group’s Financial Policy. This receivables carry varying degrees of risk, and depend on the enables the Group to mitigate the effects of currency fluctuations customer, term to maturity and whether any payment guarantees up to two years. Forward contracts are the most commonly used or similar have been provided. hedging instruments. Options are used only to a limited extent. Historically, the Group has had a relatively low percentage of Currency accounts within the group account scheme are used to bad debts. Kongsberg Defense Systems and Kongsberg Protech hedge small amounts with a short term to maturity. Systems mainly have government customers, and are to a small In addition to financial instruments, actions such as ensuring that extent exposed to credit risk. Kongsberg Maritime generally serves costs incurred are in the same currency as the sales contract, are customers from the private sector, and is more exposed to credit used to reduce foreign currency exposure. risk. Unrest in the global economy in general and the volatility in the KONGSBERG uses a financial system that handles all foreign shipyard and shipping industry in particular increases the credit risk exchange transactions. In addition, a separate risk management in the markets addressed by Kongsberg Maritime. Kongsberg function has been set up to monitor all financial transactions Maritime has made provisions to take this into account. Kongsberg according to policy. Maritime has its own credit manual and dedicated employees to Note 21 B) “Financial instruments – Foreign currency risk and the monitor and reduce the credit risk. Credit insurance is used only to hedging of foreign currency” has more information. a limited extent, but is considered in certain cases. The Group has a policy decision about maintaining a responsible Interest rate risk balance between increasing sales at good margins and the risk of At 31 December 2014, KONGSBERG had two bond loans totalling losses. In addition, large parts of the Group operate on the basis of MNOK 750 and an undrawn syndicated credit facility of MNOK specially adapted credit manuals including routines for debt collec- 1,500. tion. Concerning credit risk, KONGSBERG has strict requirements KONGSBERG has a policy of emphasising predictability for for creditworthiness and has placed restrictions on its aggregate interest expenses at times when changes in the interest level have level of credit exposure. a significant impact on consolidated profits. Each year, the funding Note 18 “Accounts receivable” has more information. plan is presented to the Board of Directors to consider the interest rate exposure. Note 21 D “Financial instruments – interest rate risk” Market risk arising from financial investments has more information. KONGSBERG’s investments in other companies are based on strategic considerations. The value of the Group’s financial Credit/counterparty risk investments is exposed to fluctuations in the equity market. Counterparty risk is the risk that KONGSBERG’s contractual Investments are evaluated and followed up centrally. The Group counterparty will not meet its obligations to KONGSBERG or settle regularly reports on trends in the value of financial investments. its forward currency contracts, interest rate contracts and monetary Note 17 “Available for- sale shares” has more information. investments. KONGSBERG’s financial policy requires financial

6 Segment information

For management purposes, the Group is organised into business proven competitive on the international arena and have achieved areas based on the industries in which the Group operates, and a growing export share in recent years. All defence-related exports reporting requirements apply to the following four operating are contingent on the approval of the Norwegian authorities. One segments: key element of the market strategy is to form alliances with major international defence enterprises. Kongsberg Defence Systems Kongsberg Maritime delivers products and systems for dynamic delivers systems for command and weapon control, weapon positioning, navigation and automation for commercial vessels and guidance and surveillance, communications solutions and missiles. offshore installations, as well as products and systems for seabed In Kongsberg Defence Systems, 25 per cent of the revenue is surveys, surveillance, training simulators and fishing vessels and related to Missile Systems, 30 per cent to Integrated Defence fisheries research. The business area is among the market leaders Systems, 16 per cent to Space and Surveillance, 11 per cent to in these areas. Countries with significant offshore and shipbuilding Naval System, 9 per cent to Aerostructures and 9 per cent to industries are important markets. In Kongsberg Maritime, 61 per Defence Communications. cent of the revenue is within Offshore, 14 per cent within Merchant Marine and 25 per cent within Subsea. Kongsberg Protech Systems main product is the weapon guidance system Protector RWS developed to protect military personnel in Kongsberg Defence Systems is Norway’s premier supplier of armoured vehicles. Kongsberg is by far the largest player in this defence and space-related systems. Norway’s Armed Forces has market. The system has been sold to many countries. The RWS is a been the single most important customer over time. Solutions product in demand for a growing range of military vehicles. The US developed in collaboration with the Norwegian Armed Forces have Army is the business area’s largest customer.

KONGSBERG • Annual Report and Sustainability Report 2014 39 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Kongsberg Oil & Gas Technologies is a supplier of high-tech The funding of the business areas does not necessarily give an solutions to the international oil and gas industry. The business accurate impression of the financial soundness of the individual area offers engineer services, innovative underwater solutions and business areas. Consequently, financial items, net interest-bearing decision making systems. Kongsberg Oil & Gas Technologies debt and cash are not assigned to segments, but rather presented delivers systems and solutions to all phases of the lifetime of a field, for the Group as a whole. The same applies to tax expense and from exploration and early phase engineering to field development balance sheet items associated with deferred tax liabilities and taxes and production. payable, as these items are influenced by tax-related transfers between the business areas. The remainder of the Group’s activities is included in the column Management monitors the operating segments’ EBITAs on a “Other”. These activities include income, expenses, assets, liabilities regular basis and uses this information to analyse the various and other elements that cannot be assigned to the segments in an operating segments’ performance and to make decisions regarding appropriate manner. This generally involves shareholder costs, allocation of resources. The operating segments’ performance is certain overheads and effects on profit/loss related to property assessed based on EBITA and return on capital employed. occupied by parties other than the Group’s own units. Information on the Group’s operating segments that are required to report is presented below.

Operating segment data Kongsberg Kongsberg Kongsberg Oil & Gas Kongsberg Defence Protech Tech­- Elimina- Con- MNOK Maritime Systems Systems nol­ogies Other tions solidated

2014 Revenue from external customers 9 689 4 175 1 550 943 256 - 16 613 Revenue from group companies 14 101 16 74 347 (552) - Total revenues 9 703 4 276 1 566 1 017 603 (552) 16 613 Operating profit before depreciation and amortisation (EBITDA) 1 441 530 254 (99) (66) - 2 060 Depreciation (175) (95) (53) (23) 4 - (342) Operating profit before amortisation (EBITA) 1 266 435 201 (122) (62) - 1 718 Amortisation (45) (21) (31) (43) - - (140) Impairment (320) (320) Operating profit (EBIT) 1 221 414 170 (485) (62) - 1 258

Segment assets 8 485 3 194 1 663 980 (846) (87) 13 389 Segment investments 253 112 27 51 2 - 445 Current segment liabilities and provisions 3 962 3 555 847 282 (694) (89) 7 863

2013 Revenue from external customers 8 240 4 399 2 418 1 042 224 - 16 323 Revenue from group companies 24 155 2 35 319 (535) - Total revenues 8 264 4 554 2 420 1 077 543 (535) 16 323 Operating profit before depreciation and amortisation (EBITDA) 1 179 520 419 49 (25) - 2 142 Depreciation (161) (113) (57) (15) 1 - (345) Operating profit before amortisation (EBITA) 1 018 407 362 34 (24) - 1 797 Amortisation (42) (29) (15) (52) - - (138) Operating profit (EBIT) 976 378 347 (18) (24) - 1 659

Segment assets 7 308 3 128 1 719 1 316 233 (102) 13 602 Segment investments 188 126 31 95 8 - 448 Current segment liabilities and provisions 3 134 2 159 1 302 292 240 (102) 7 025

1. There are no differences between the measurement methods used at the segment level and those applied to the consolidated financial statements. 2. Intra-group transactions between the different segments are eliminated upon consolidation. Transactions between the segments are based on market prices. 3. The different operating segments’ EBITAs include income and expenses from transactions with other operating segments within the Group. 4. Segment assets do not include available-for-sale shares, other non-current assets, derivatives and cash and cash equivalents as these assets are controlled on a group basis. 5. Segment liabilities do not include deferred tax liabilities, taxes payable, interest-bearing liabilities, other non-current liabilities or provisions and derivatives, as these liabilities are controlled on a group basis. 6. Investments comprise acquired property, plant and equipment, intangible assets and goodwill.

40 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Reconciliation of assets Reconciliation of current liabilities and provisions

MNOK 2014 2013 MNOK 2014 2013

Segment assets 13 389 13 602 Current segment liabilities and Shares available for sale 1) 132 140 provisions 7 863 7 025 Shares in joint ventures and Short-term interest-bearing debt - 526 associated companies2) 313 - Derivatives 2 732 312 Other non-current assets 100 155 Fair value adjustments related to Derivatives 215 173 financial instruments 472 150 Fair value adjustments related to Calculated income tax payable 29 16 financial instruments 1 700 93 Total current liabilities and provisions 11 096 8 029 Cash and cash equivalents 4 424 3 272 Total assets 20 273 17 435

1) Comparison figures are discussed in Note 17 “Available-for-sale shares” 2) See Note 32 “Investments in associated companies and joint ventures”

Geographical information In presenting information by geographical segments, earnings are and Asia. Fixed assets include property, plant and equipment, distributed based on the customers’ geographical location, while the intangible assets and goodwill (financial instruments, deferred tax data on fixed assets are based on the location of the physical assets, pension fund assets and rights ensuing from insurance investment or relationship to the relevant acqusition. The Group’s agreements are not included). activities are generally divided into Norway, rest of Europe, America

North South MNOK Norway Europe America America Asia Other Total

2014 Operating income from external customers 3 830 3 559 3 403 421 4 696 704 16 613 Operating income in % of the total 23% 21% 21% 3% 28% 4% Fixed assets 1) 4 156 130 736 29 305 2 5 358

2013 Operating income from external customers 3 949 4 123 3 542 409 4 020 280 16 323 Operating income in % of the total 24% 25% 22% 2% 25% 2% Fixed assets1) 4 807 122 584 22 253 3 5 791

1) Fixed assets above comprise property, plant and equipment, goodwill and other intangible assets.

7 Sale of property

On 17 December 2014, KONGSBERG sold three properties, of KONGSBERG is guaranteeing the costs of construction and the which two are under construction. Agreements relating to lease- completion date for the buildings, as well as maintenance of the back of 15 years were entered into for all three properties. buildings during the leaseback period. Recognised liabilities related Agreements relating to further subletting to intra-group parties and to these guarantees total MNOK 57, of which MNOK 48 is classi­fied external lessees were entered into. under other non-current liabilities. See also Note 24 “Provisions” and The properties were sold at a property value of MNOK 463. The Note 27 “Sale and leaseback.” properties were sold as part of the limited companies Kongsberg Næringsbygg 7 AS, Kongsberg Næringsbygg 8 AS and Kongsberg Næringsbygg 9 AS. The total purchase amount for the shares was MNOK 137, and entailed profits of MNOK 61. The transaction is not subject to tax in accordance with the exemption model. The trans- action entailed a net cash settlement of MNOK 264, of which MNOK 131 is settlement for the shares less transaction costs and MNOK 133 is settlement for Group debts.

KONGSBERG • Annual Report and Sustainability Report 2014 41 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

8 Inventories 9 Payroll expenses

The Group’s total inventories include the following: Salaries and other personell expenses represent expenses associ- ated with the remuneration of personell employed by the Group. MNOK 31 Dec 14 31 Dec 13 MNOK Note 2014 2013 Raw materials 1 813 1 824 Work in progress 743 472 Salaries 4 467 4 242 Finished products 708 648 Performance-based salary 28 70 62 Total 3 264 2 944 Social security tax 854 830 Pension expenses, defined benefit plans 10 157 141 Pension expenses, defined MNOK 2014 2013 contribution pension plans 10 306 280 Other benefits 264 187 Cost of goods for the period 5 572 5 415 Total payroll expenses 6 118 5 742

Of which Impairment on inventories during Average no. of FTE (full-time the accounting year 104 31 employees) 7 494 7 272 Reversal of previous years' impairment (16) -

10 Pensions

KONGSBERG has a service pension plan that complies with legisla- Insurance. The pension benefits are defined by the number of tion, and consists of a defined contribution plan and a closed defined contribution years and the salary level of the individual employee. benefit plan. The service pension plan covers all Group employees in Pension costs are distributed over the employee’s accrual period. Norway. At 31 December 2014, there are about 4,850 employees Based on the current National Insurance system before 1 January in Norway covered by the pension plans. KONGSBERG endeavours 2011 and full accrual, the plan gives entitlement to about 65 per to ensure that as many of its employees as possible outside Norway cent of the salary at retirement, including benefits from the are also covered by service pension plans. National Insurance plan until the age of 77, then the service pension component will be reduced by 50 per cent for the remaining The defined contribution plan lifetime. The Group also has a collective, unfunded contribution plan The Group introduced a defined contribution pension plan for all for salaries between 12G and 15G. The collective, unfunded benefits employees under the age of 52 on 1 January 2008. The contribution plan corresponds to about 60 per cent of the share of the basic rates are 0 per cent of the basic wage up to 1G, 5 per cent of the wage that exceeds 12G until the age of 77, and then the benefit is basic wage between 1G and 6G, and 8 per cent of the basic wage reduced by 50 per cent for the remaining lifetime. Special terms and from 6G up to 12G. The employees can influence the way the funds conditions apply for executives. This is described in Note 28 are managed by choosing to invest either 30, 50 or 80 per cent, “Statement on the remuneration of the Group CEO and Executive respectively, of their portfolios in shares. The Group also has a Management”. These supplementary plans were discontinued in collective, unfunded contribution plan for salaries between 12G and connection with the transition to defined contribution pension plans. 15G. The entity’s deposits in this plan are 18 per cent of the share of the basic wage in excess of 12G, up to a ceiling of 15G. Special Risk coverage terms and conditions apply for executives. This is described in Disability pension from the company shall give an addition to the Note 28 “Statement on the remuneration of the Group CEO and expected disability pension from the National Insurance Plan, so Executive Management”. (The employees have the same invest- that total payment constitutes approximately 65 per cent of ment choices in the supplementary plan as in the main plan). pensionable income based on full accrual. An additional 10 per cent KONGSBERG’s companies abroad generally have defined contribu- disability pension is paid for each child under the age of 21, up to tion plans. At 31 December 2014, about 4,360 employees in Norway maximum 6 children. The payment depends on the extent of and most of the employees abroad were covered by these plans. disability and the possibility for full coverage. From 1 January 2013 The contribution is expensed when incurred. the risk pensions are unfunded for the share of the basic wage that exceeds 12G. In practice this implies that KONGSBERG is self The defined benefit plan insurer for the risk pension for future periods. In connection with the transition to the defined contribution plan on 1 January 2008, employees aged 52 or more remained in the defined benefit plan. The pension plan is insured through DNB Life

42 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Early retirement The calculation of future pensions in the benefits plan is based on In 2009, the Group introduced new rules for early retirement for the following assumptions: newly hired members of executive management and others in certain key positions. The rules entail early retirement at the age 31 Dec 14 31 Dec 13 of 65 at the latest, but with reciprocal rights for the company and members of the pension schemes to request early retirement from Economic assumptions the age of 63. Benefits are equal to 65 per cent of the annual wage, Discount rate 2.30% 3.75% based on a minimum of 15 contribution years. If the employee Expected asset return 2.30% 3.75% resigns between 63 and 65, this will reduce pension earnings for Wage adjustment 2.00% 3.00% other plans. Pension base-level (G) adjustment 2.50% 3.50% The company has decided not to continue the scheme with early Pension adjustment 1.75% 2.25% retirement agreements for executives (and employees in certain key positions who previously were offered agreements on early retire- Demographic assumptions ment) employed after 1 July 2013. These individuals will receive an Mortality K 2013 K 2013 additional contribution of 12 per cent of the basic salary in excess of Disability IR 73 IR 73 12G to the unfunded pension scheme, as long as they are employed, but only until the age of 65 at the latest. Voluntary turnover 4.5% 4.5% for all ages for all ages

The pension calculations are based on a new mortality table K2013. The reason is an increased life expectancy which will lead to higher pension obligations. IR 73 concerns tables for expected disability. The mortality and disability risks are based on public tables and observations of disabilities at KONGSBERG. The probability that an employee in a given age group will become disabled or die within one year, and the life expectancy is as follows:

Disability % Mortality % Estimate life Age Men Women Men Women Men Women

20 0.1 0.2 89 94 40 0.3 0.4 0.1 0.0 88 92 60 1.4 1.8 0.4 0.3 87 90 80 4.4 3.0 90 92

The disability rate in IR 73 was chosen because it offers the best approach to KONGSBERG’s disability statistics. This is based on KONGSBERG’s historical figures, where about 25 per cent of the disability pension has been reimbursed through an international pool.

The pension costs of the year were calculated as follows:

MNOK 2014 2013

Present value of the accrued contribution of the year 125 122 Interest cost on accrued pension liabilities 80 75 Estimated return on pension plan assets (61) (59) Accrued social security expenses 20 19 Total 164 157 Settlement of old early retirement plan incl. social security tax 12 - Total net pension costs for the year including finance items 176 157 Adjusted for net interest classified as finance expense (19) (16) Total net pension costs for the year 157 141

Defined contribution pension plan costs in Norway 281 260 Defined contribution pension plan costs abroad 25 20

Net interests costs are classified as finance expenses.

KONGSBERG • Annual Report and Sustainability Report 2014 43 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Change in net pension liabilities recognised on the balance sheet 2014 2013 MNOK Funded Unfunded Total Funded Unfunded Total

Changes in gross pension liabilities Gross pension liabilities at 1 January 2 154 234 2 388 1 897 187 2 084 Net change in social security expenses 15 6 21 21 8 29 Acquisition - - 35 - 35 Present value of current year's contribution 110 15 125 112 10 122 Interest expenses on pension liabilities 74 6 80 70 5 75 Actuarial losses/gains 144 16 160 166 (4) 162 Settlement of old early retirement plan 10 10 - Transition to the equity method (34) - (34) - - - Plan change - - - (67) 58 (9) Payments of pensions/paid-up policies (92) (22) (114) (80) (30) (110) Gross pension liabilities at 31 December 2 371 265 2 636 2 154 234 2 388

Changes in gross pension fund assets Fair value, pension plan assets 1 January 1 631 - 1 631 1 552 - 1 552 Expected return on pension funds 61 - 61 59 - 59 Actuarial losses/gains 13 - 13 (47) - (47) Premium payments 135 - 135 127 - 127 Acquisition - - - 29 - 29 Transition to the equity method (27) - (27) - - - Plan change - - - (9) - (9) Payments of pensions/paid-up policies (92) - (92) (80) - (80) Fair value, pension plan assets 31 December 1 721 - 1 721 1 631 - 1 631 Net capitalised pension liabilities at 31 December (650) (265) (915) (523) 234 (757)

The distribution of pension plan assets by investment categories at 31 December 2014 and in previous periods:

MNOK 2014 2013 2012 2011 2010

Long-term bonds 598 576 559 512 452 Money market 12 403 357 336 151 Short-term bonds 638 264 248 219 205 Shares 160 139 93 117 287 Property 258 227 264 263 246 Other 55 22 31 15 27 Total 1 721 1 631 1 552 1 462 1 369 Recognised return on pension plan assets 5.4% 4.4% 5.6% 3.2% 6.2%

The secured pension scheme is insured in DNB Liv, and the Group’s pension funds are thereby regulated by an insurance policy. The insurance policy cannot be traded, and the value is determined in accordance with the legislation on insurance businesses. The insurance has an interest guarantee, implying that DNB Liv carries the risk for the return on the pension funds.

44 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

MNOK 2014 2013 2012 2011 2010

Net liabilities at 1 January (757) (532) (460) (316) (340) Net change in social security expenses (21) (29) (9) (18) 3 Recognised pension cost (144) (138) (96) (82) (78) Settlement, pension plan (10) - (13) 5 34 Premium payments 135 127 141 147 86 Disbursements 22 30 27 30 26 Purchase/sale - (6) - (11) - Transition to the equity method 7 - - - - Actuarial losses/gains (147) (209) (122) (215) (47) Net pension liabilities in balance sheet at 31 December (915) (757) (532) (460) (316)

Actuarial loss/gain is recognised in the statement of comprehensive income by MNOK 168 incl. social security expense. For associates, actuarial loss is recognised in the statement of comprehensive income in the amount of MNOK 6 after tax.

Historical information

MNOK 2014 2013 2012 2011 2010

Gross pension liabilities at 31 December 2 636 2 388 2 084 1 922 1 685 Fair value, pension plan assets 31 December 1 721 1 631 1 552 1 462 1 369 Net pension liabilities 31 December (915) (757) (532) (460) (316)

Actuarial gains/losses pension liabilities 31 December 160 162 76 136 12 Actuarial gains/losses pension assets 31 December 13 (47) (46) (79) (35)

Accumulated actuarial gains/losses recognised in the statement of comprehensive income after tax (1 521) (1 399) (1 227) (1 145) (968) Of which constitute experience deviations (1 002) (1 056) (1 076) (1 053) (968)

Contractual early retirement plan The total pension premium payments for the defined benefit plan The Group’s general contractual early retirement plan gives a for 2015 are expected to be about MNOK 130. life-­long supplement to the ordinary pension. Employees can choose The pension benefits are based on the individual employee’s to draw on the new plan from the age of 62, even if they continue number of years of service and salary level upon reaching to work. The new plan is a defined benefit multi-employer pension retirement age. plan, and it is funded through premiums established as a percentage Net pension liabilities are determined on the basis of actuarial of wages. For the moment, there is no reliable measurement or estimates made on assumptions related to the discount rate, future allocation of liabilities and funding as regards the plan. For account- wage growth, pension adjustments, projected return on pension ing purposes, the plan is therefore considered to be a deposit-based fund assets, and employee turnover. These assumptions are up- pension plan in which premium payments are expensed against dated annually. The discount rate is stipulated on the basis of the income on an ongoing basis, and no provisions are made in the covered bond interest rate, which reflects the time frame for paying financial statements. A premium is paid to the new plan of the total out on the pension liabilities for the benefit plan. In KONGSBERG’s payments made between 1G and 7.1G to the company’s employees. opinion, the market for covered bonds is sufficiently deep and For 2014, the premium was 2.2 percent, and it was set to 2.4 per shows reliable pricing. The pension liability would have been approx­ cent for 2015 (estimated to MNOK 75). There is no accumulation imately 9 per cent higher using a government bond rate of 1.5 per of capital in the plan and further increases in the premium level are cent, all other factors held constant. Pension adjustments are now expected over the coming years. calculated after adjustment for inflation compared to minimum adjustments in previous years. The pension liability would have been Others approximately 12 per cent lower using minimum adjustment, all other The pension expenses for the year are calculated on the basis of factors held constant. the financial and actuarial assumptions at the beginning of the year. The balance sheet shows net pension liabilities including social Gross pension liabilities are calculated on the basis of the financial security. and actuarial assumptions at the end of the year. The gross value of pension fund assets is calculated on the assumption that there will be an annual return of 3.0 per cent, being the expectation on 31 December 2014. The value adjusted return on investments was 5.4 per cent, but will not be included in the capitalised assets until 2015.

KONGSBERG • Annual Report and Sustainability Report 2014 45 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Expected pension payments:

MNOK

2015 95 2016 103 2017 112 2018 118 2019 120 Next 5 years 725

Sensitivity analysis of pension calculations The following estimates are based on facts and circumstances that applied at 31 December 2014, provided that all other parameters are constant. Actual results may deviate significantly from these estimates.

Annual salary growth/ Annual adjustment Retirement Discount rate basic amount of pensions rate Mortality 1 year lower 1 year expected increased Changes in % are lifetime lifetime percentage points 1% -1% 1% -1% 1% -1% 1% -1% at age 67 at age 67

Change in pension Defined benefit obligation (PBO) 11–12% 11–12% 5–6% 5–6% 7–8% 7–8% 2–3% 2–3% 2–3% 2–3% Net pension cost for the period 12–13% 12–13% 5–6% 5–6% 7–8% 7–8% 2–3% 2–3% 1–2% 1–2%

When calculating the sensitivity for mortality, we adjust K2013 such that the life expectation for a 67 year old is increased by one year and reduced by one year, respectively. This is relevant for life expectation for a 67 year old in 2014 according to the mortality table K2013.

46 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

11 Property, plant and equipment

Buildings and Machinery Equipment other real MNOK and plants and vehicles property Land Total

Cost of acquisition 1 January 2013 1 112 1 752 1 761 215 4 840 Additions 85 219 48 4 356 Additions through business combinations - 11 - - 11 Disposals (8) (14) (5) - (27) Translation differences 21 26 31 2 80 Total acquisition cost 31 Dec 2013 1 210 1 994 1 835 221 5 260 Adjustment of incoming balance 1 Jan 20141) 11 (295) (47) (11) (342) Additions 78 150 102 9 339 Disposals (25) (41) (16) - (82) Disposal through sale of subsidiary - - (99) - (99) Translation differences 40 66 85 10 201 Total acquisition cost 31 Dec 2014 1 314 1 874 1 860 229 5 277

Accumulated impairment and depreciation 1 January 2013 462 1 198 578 - 2 238 Depreciation for the year 79 194 72 - 345 Accumulated depreciation through disposal (2) (12) (2) - (16) Translation differences 13 17 8 - 38 Total accumulated depreciation 31 Dec 2013 552 1 397 656 - 2 605 Adjustment of incoming balance 1 January 20141) - (156) (12) - (168) Depreciation for the year 87 174 81 - 342 Accumulated depreciation through disposal (19) (36) (17) - (72) Translation differences 23 46 24 - 93 Total accumulated depreciation 31 Dec 2014 643 1 425 732 - 2 800 Carrying amount 31 Dec 2013 658 597 1 179 221 2 655 Carrying amount 31 Dec 2014 671 449 1 128 229 2 477

Useful life 3–10 years 3–10 years 10–33 years N/A Annual rent paid for off-balance sheet property, plant and equipment - 9 260 - 269

1) Adjustment of incoming balance 1 Jan. 2014 is mainly related to withdrawal of accumulated values associated with the 50% owned company Kongsberg Satellite Services AS which, from 1 Jan. 2014, is recognised according to the equity method.

Estimation uncertainty For property, plant and equipment, there is estimation uncertainty with regards to the determination of estimated remaining useful life and expected residual value. These factors are considered annually.

KONGSBERG • Annual Report and Sustainability Report 2014 47 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

12 Intangible assets

Other Activated intangible MNOK Goodwill Technology development assets Total

Acquisition cost 1 January 2013 2 430 664 565 60 3 719 Additions - - 80 1 81 Addition through business combination 273 92 4 38 407 Disposals - - (2) - (2) Translation differences 26 21 1 2 50 Total acquisition cost 31 Dec 2013 2 729 777 648 101 4 255 Additions 2 2 102 - 106 Disposals - - (83) - (83) Translation differences 79 59 - 5 143 Total acquisition cost 31 Dec 2014 2 810 838 667 106 4 421

Accumulated amortisation and impairment 1 January 2013 420 379 164 6 969 Amortisation - 71 48 19 138 Disposals - - (2) - (2) Translation differences 1 11 - 1 13 Total accumulated amortisation 31 Dec 2013 421 461 210 26 1 118 Amortisation - 75 55 10 140 Impairment1) 300 3 17 - 320 Disposals - - (83) - (83) Translation differences 1 39 - 5 45 Total accumulated amortisation and impairment 31 Dec 2014 722 578 199 41 1 540

Carrying amount 31 Dec 2013 2 308 316 438 75 3 137 Carrying amount 31 Dec 2014 2 088 260 468 65 2 881

Useful life 8–10 years 5 years 8–10 years Remaining useful life 1–9 years 3–5 years 4–9 years

1) Impairment of goodwill mainly applies to the business area Kongsberg Oil & Gas Technologies. Information about the background for the impairment is provided in Note 13 “Impairment testing of goodwill”.

With the exception of goodwill, which cannot be amortised, the amortisation of intangible assets is either straight-line over the useful life or based on the number of units produced. The amortisation starts when the intangible asset is available for use.

Product maintenance, research and development recognised in profit and loss

2014 2013 Research and Research and Product development Product development MNOK maintenance costs Total maintenance costs Total

Kongsberg Maritime 100 590 690 115 543 658 Kongsberg Defence Systems 12 86 98 8 84 92 Kongsberg Protech Systems 22 57 79 29 55 84 Kongsberg Oil & Gas Technologies 10 60 70 10 46 56 Total 144 793 937 162 728 890

The Group also has development through customer-based projects.

48 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Capitalisation of development projects how the final solution will turn out. As long as there is uncertainty Development projects financed by customers are not capitalised, about the final technological solution, it is difficult to estimate but KONGSBERG seeks to obtain ownership rights to the product market value. Accordingly, the criteria for capitalisation will not developed. During the development phase in an internally financed be satisfied until fairly late in the development project. Remaining project, the decision is taken whether to complete development expenses will often then be insignificant. and begin capitalisation. Kongsberg Oil & Gas Technologies capitalises parts of its At Kongsberg Defence Systems, current capitalisations are development related to software solutions and development relat­ed to the development of map and communications systems projects within subsea. and to KONGBERG’s share of the development of Joint Strike Missile. Estimation uncertainty At Kongsberg Protech Systems, this year’s capitalised develop- Capitalised development costs are amortised according to the ment costs were minimal, as the development of the new product estimated production volume or lifetime. Both estimated production concept Medium Caliber RWS was finalised during 2013. The volume or lifetime can change over time. These factors are con­ amortisation of Medium Caliber RWS has started, from 4th quarter sidered annually, and the amortisation is adjusted when considered 2013. necessary. When testing the value of capitalised development Internally financed development projects at Kongsberg Maritime costs, the Group applies the same principles and methods as used generally consist of many projects, each of which has a limited for impairment testing. Regarding estimate uncertainty associated overall scope. These development projects are not considered to be with this matter, see Note 13 “Impairment testing of goodwill”. eligible for capitalisation. Many of the projects also entail consider- able uncertainty about whether they are technologically feasible and

13 Impairment testing of goodwill

Goodwill flows before tax and the discount rate before tax had been used. Goodwill obtained through acquisitions is allocated to the Group’s The discount rate before tax has been stipulated using an iterative operating segments and followed up and tested collectively for the method and is shown in a separate table. group of cash-generating units that constitute the operating The assumptions are based on historical results an observable segment. Goodwill is followed up for groups of cash-generating market data. units that are similar to what is defined as the operating segment pursuant to Note 6 “Segment information”. Key assumptions Goodwill is allocated to the operating segments as follows: Discount rate The discount rates are based on a weighted average cost of capital MNOK 31 Dec 14 31 Dec 13 (WACC) method, whereby the cost of equity and the cost of liabilities are weighted according to an estimated capital structure. Kongsberg Maritime 1 580 1 502 The discount rates reflect the market’s required return on invest- Kongsberg Defence Systems 172 170 ment at the time of the test and in the industry to which the cash generating unit belongs. The estimated capital structure is based on Kongsberg Oil & Gas Technologies 336 636 the average capital structure in the industry in which the cash Total goodwill in balance sheet 2 088 2 308 generating unit operates and an assessment of what is a reasonable and prudent long-term capital structure. The CAPM model is used The Group tests goodwill for impairment annually, or more frequent- to estimate the cost of equity. In accordance with the CAPM model, ly if there are indications of impairment. the cost of equity consists of risk-free interest as well as an The Group has used value in use to determine recoverable individual risk premium. The risk premium is the entity’s systematic amounts for the cash flow-generating entities. Value in use is risk (beta), multiplied by the market’s risk premium. The risk-free determined by using the discounted cash flow method. The interest is estimated on a 10-year Norwegian government bond expected cash flow is based on the business areas’ budgets and interest rate and is based on all cash flows being translated to NOK. long term plans, which are approved by KONGSBERG’s Board of The cost of liabilities represents an expected long-term after-tax Directors and executive management. Budgets and long-term plans interest rate for comparable liabilities and consists of risk-free cover a five-year period (explicit prognosis period). Approved interest and an interest spread. budgets and long-term plans are adjusted for cash flows related to investments, restructuring, future product improvements and new Profit margin (EBITDA) development, if the elements are considered significant for the The future profit margin presumes an assessment of the different impairment test. After the five years of explicit plans, the units’ cash-generating units. The historical level has been used for cash flows are stipulated by extrapolation. At the beginning of the Kongsberg Maritime and Kongsberg Defence Systems, adjusted for extrapolation period, the entity is assumed to be in a stable phase. future expectations. As regards Kongsberg Oil & Gas Technologies, To calculate value in use, the Group has used anticipated cash flows we have assumed a low profit margin for the first two years, after tax and, correspondingly, discount rates after tax. The recover- followed by gradual improvement to a level considered to be normal able amount would not have been significantly different if cash for comparable enterprises.

KONGSBERG • Annual Report and Sustainability Report 2014 49 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Growth rate Market shares Growth rates in the explicit prognosis period are based on For entities operating in markets where it is relevant to measure management’s expectations of market trends in the markets in market shares, it is expected that established positions in general which the undertaking operates. The Group uses stable growth will be maintained, but there could be increases and setbacks in rates to extrapolate cash flows in excess of five years. The certain areas. long-term growth rate beyond five years is not higher than the expected long-term growth rate in the industry in which the undertaking operates.

Key assumptions per cash flow-generating unit Kongsberg Kongsberg Kongsberg Oil & Gas Per cent Maritime Defence Systems Technologies

Discount rate before tax 11.7 8.8 10.4 Discount rate after tax 9.1 7.2 9.1 Long-term nominal growth rate 2 2 2 Inflation 2 2 2

Impairment Estimation uncertainty Goodwill in the business area Kongsberg Oil & Gas Technologies There will always be uncertainty related to the estimate of value in was impaired by MNOK 300 in 2014. This was done as a result of use. Assessments are based on best judgement and with the KOGT’s high exposure vis-à-vis the oil and gas market and the parameters used for comparable industries in the various cash- changed marked assumptions that were realised in the last half generating units. These calculations are based on discounted cash of 2014. flows in the future. Significant changes in the cash flows will affect the value of goodwill. Sensitivity analysis In connection with impairment tests of goodwill, sensitivity analyses are carried out for each individual cash generating unit. Kongsberg Maritime and Kongsberg Defence Systems will not be in an impairment situation before there are relatively large changes in the key assumptions, and these changes are considered to be outside the probable outcome. For Kongsberg Oil & Gas Technology, as mentioned above, goodwill has been impaired by MNOK 300. How- ever, the business area is still in a start-up phase and therefore more sensitive to substantial changes. These factors will still be included in an assessment of the future development in the business area.

14 Finance income and finance expense

MNOK 2014 2013

Interest income from assets at amortised cost 76 36 Derivatives at fair value through profit and loss 13 8 Foreign exchange gain 40 26 Other finance income 8 25 Finance income 137 95

Interest expense from liabilities at amortised cost 30 43 Derivatives at fair value through profit and loss 12 9 Foreign exchange loss 20 23 Discounts of non-current provisions 3 3 Other finance expenses 45 32 Finance expenses 110 110

Net finance item recognised in income statement 27 (15)

50 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

15 Income tax

Income tax expense

MNOK 2014 2013

Tax payable Norway - 12 Tax payable abroad 135 86 Change in deferred tax 270 321 Income tax expense 405 419

Reconciliation from nominal to effective tax rate

MNOK 2014 2013

Profit before tax 1 285 1 644 Result from joint arrangements and associated companies (68) - Profit before tax excluding joint arrangements and associated companies 1 217 1 644 Tax calculated at tax rate 27% (28%) of profit before tax 329 460 Effect of reducing the tax rate to 27% - (33) Effect of tax differences and unrecognised tax benefits abroad 6 (12) Impaired goodwill 81 - Sale of property shares (17) - Tax effect of contingent compensation for purchases, disposals and impairment of shares - 1 Other permanent differences 6 3 Tax expense 405 419

Effective tax rate 33.2% 25.5%

Income from long-term construction contracts is not recognised for tax purposes until the risk and responsibility has been transferred to the customer. This has no effect on the tax expense in the income statement , but as a consequence, tax payable will fluctuate over time.

Deferred tax asset and deferred tax liability

MNOK 31 Dec 14 31 Dec 13

Deferred tax asset Pensions 247 204 Provisions 372 457 Net derivatives 680 39 Accumulated tax loss to carry forward 626 270 Deferred tax assets - gross 1 925 970

Deferred tax liability Fixed assets 313 338 Construction contracts in progress 2 546 1 633 Deferred tax liabilities - gross 2 859 1 971

Net recognised deferred tax liabilities (934) (1 001)

Tax rate in Norway 27% 27%

KONGSBERG • Annual Report and Sustainability Report 2014 51 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Change in deferred tax recognised in other comprehensive income:

MNOK 31 Dec 14 31 Dec 13

Pensions (45) (67) Cash flow hedges (300) (129) Total (345) (196) Addition of deferred tax at business combinations / transition equity method 8 29

Payments of dividends to the parent company’s shareholders have no impact on the Group’s payable or deferred tax.

16 Earnings per share

MNOK 2014 2013

Profit for the year attributable to the shareholders Profit after tax 880 1 225 Non-controlling interests' share of the result 7 (3) Profit for the year/diluted profit attributable to the ordinary shareholders 873 1 228

Number of shares Note 2014 2013

Average weighted number of shares outstanding at 1 January 23 120 120 Average weighted number of shares at 31 December 120 120

NOK 2014 2013

Earnings per share for the year 7.28 10.24 Earnings per share for the year, diluted 7.28 10.24

17 Available-for-sale shares

Available-for-sale shares Available-for-sale shares are recognised at fair value. Quoted shares at 31 December 2014 consisted of shares in Kitron ASA (19 per cent MNOK 31 Dec 14 31 Dec 13 ownership), listed on the Oslo Stock Exchange, and shares in KBC Advanced Technologies PLC (5 per cent ownership), listed on the Quoted shares 101 61 London Stock Exchange. The shares in KBC Advanced Technologies Other shareholdings 1) 31 79 PLC were acquired in 2014. KONGSBERG does not have significant influence in the companies. Available-for-sale shares 132 140 Changes in the fair value of shares, with the exception of impairment losses, are recognised in other comprehensive income. 1) At 31 Dec. 2013, the item Other shareholdings includes shares in joint ventures Significant and permanent impairment losses are recognised in the with the amount of MNOK 49, which is shown on a separate line in the 2014 income statement. In 2014, MNOK 6 was recognised as an accounts. Balance sheet figures for 2013 have not been restated See also impairment in other comprehensive income (a decrease in 2013 of Note 32 “Investments in joint ventures.” MNOK 7). The decrease in value concerns Kitron ASA and KBC Advanced Technology PLC. No impairment has been recognised in the income statement in 2014. In percentage of total market value, quoted shares constitute 77 per cent of available-for-sale shares.

52 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Fair value of shares Sensitivity analysis on investments in shares The shares are measured at market value on the balance sheet A change in market prices of the quoted shares of 10 per cent date. The market value is calculated as follows: would result in an increase/decrease in the added value of MNOK 1. The last traded price on the stock exchange or the last traded 10 which would be recognised directly in the statement of price on the OTC list (The Norwegian Securities Dealers comprehensive income (MNOK 6 based on balance sheet values at Association’s Over-The-Counter List) 31 December 2013). 2. The price of the last share transactions for the sale/purchase or issue of unquoted shares 3. Valuation based on the discounted cash flow 4. Acquisition cost as an estimate of market value. This refers to investments that are not of significant value

18 Other non-current assets

MNOK 31 Dec 14 31 Dec 13

Loans to employees 27 42 Other non-current assets 73 113 Total other non-current assets 100 155

19 Receivables

MNOK 31 Dec 14 31 Dec 13

Gross receivables 2 712 2 361 Provision for bad debts (142) (123) Net accounts receivable 2 570 2 238 Other receivables 532 581 Prepayments to suppliers 182 177 Net receivables 3 284 2 996

Credit risk Exposure to credit risk KONGSBERG’s credit risk and how it is managed is accounted for in Note 5 “Financial risk management objectives and policies”. The carrying amount of financial assets represents the Group’s maximum credit exposure.

MNOK Note 31 Dec 14 31 Dec 13

Gross accounts receivable 2 712 2 361 Gross other current receivables 714 758 Other non-current assets 18 100 155 Cash and cash equivalents 22 4 424 3 272 Currency forward contracts and interest rate swaps used as hedges 21A 215 173 Total exposure to credit risk 8 165 6 719

KONGSBERG • Annual Report and Sustainability Report 2014 53 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Gross receivables by region Gross receivables by customer type

MNOK 31 Dec 14 31 Dec 13 MNOK 31 Dec 14 31 Dec 13

Norway 297 392 Government institutions 975 796 EU 612 667 Private companies 1 737 1 565 Other Europe 34 12 Total 2 712 2 361 North America 769 513 South America 57 51 Asia 738 562 Other countries 205 164 Total 2 712 2 361

Impairment Age distribution, trade receivables and provisions for losses on trade receivables

31 December 2014 31 December 2013 Provision for Provision for MNOK Gross bad debts Gross bad debts

Not due 1 373 (1) 1 226 - Due, 1-30 days 562 (2) 428 (2) Due, 31-90 days 311 (1) 309 (1) Due, 91-180 days 187 (38) 97 (4) Due, more than 180 days 279 (100) 301 (116) Total 2 712 (142) 2 361 (123)

Change in the provision for bad debts

MNOK 2014 2013

Provision at 1 January (123) (155) Actual losses 20 11 Provision (44) (8) Reversed 5 29 Provision at 31 December (142) (123)

Estimation uncertainty The provision for bad debts is based on the best estimate and judgement with respect to the probability of any loss on a receivable or a group of receivables.

54 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

20 Construction contracts in progress

The Group’s main business activity is to develop and manufacture A summary of significant contract data is provided below. products and systems based on orders. Note 3C “Revenue recognition – Construction contracts/system deliveries” accounts MNOK 2014 2013 for income recognition and classification of construction contracts. Projects in progress in the table below constitute the net amount Total orders 47 075 36 492 of accumulated earned operating income less accumulated billing Operating income for the year 9 733 8 728 for all current construction contracts, where accumulated operating Accumulated operating income 32 912 26 992 income exceeds accumulated billing. Prepayments from customers Accumulated variable expenses 24 303 20 182 are the net amount of accumulated earned operating income less Remaining operating income 14 162 9 500 accumulated billing for all current construction contracts where Prepayments received 4 914 3 304 accumulated billing exceeds accumulated operating income. Project Remaining variable costs in onerous accruals are the net amount of costs incurred based on the contracts 110 115 project’s percent of completion less accumulated costs charged to the construction contract.

Estimation uncertainty Net construction contracts in progress Income related to construction contracts is recognised in line with the estimated rate of completion. Completion is normally calculated MNOK 31 Dec 14 31 Dec 13 as accrued costs in relation to expected total costs or on the basis of accrued hours measures against the expected total hours. See Projects in progress 4 350 2 200 also Note 3C “Revenue recognition – Construction contracts/ Prepayments from customers (4 914) (3 304) system deliveries”. The contracts’ revenues have been agreed. Total anticipated costs are estimated based on a combination of empirical Project accruals, assets 1 684 1 412 data, systematic estimation procedures, monitoring of efficiency Project accruals, liabilities (1 527) (893) targets and best judgement. In general, the number of remaining Net construction contracts in manhours necessary to develop or complete a project will constitute progress (407) (585) a large part of total costs. The uncertainty of the estimates is influenced by a project’s duration and technical complexity. MNOK 31 Dec 14 31 Dec 13 Principles have been established for categorising projects in terms of technological complexity and the degree of development. This Construction contracts in progress, constitutes the basis for risk assessments and recognition of project assets 3 183 1 963 profits. The projects are reviewed on a quarterly basis at a minimum. Construction contracts in progress, liabilities (3 590) (2 548) Net construction contracts in progress (407) (585)

The Group has long-term construction contracts in three of its business areas. Most of the projects executed by Kongsberg Maritime and Kongsberg Oil & Gas Technologies have a duration of less than two years, and revenues from the individual projects account for a limited share of total income. The projects performed by Kongsberg Defence Systems are of longer duration and the revenues from each individual project make a significant contribu- tion to the Group’s total income.

KONGSBERG • Annual Report and Sustainability Report 2014 55 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

21 Financial instruments

For definitions of financial instruments, reference is made to Note 3J “Financial instruments.”

A) Derivatives

MNOK Note 31 Dec 14 31 Dec 13

Current assets Excess value forward exchange contracts, cash flow hedges 71 65 Excess/less (-) value interest rate swaps, cash flow hedges 21D (12) 3 Excess value forward exchange contracts, fair value hedges 140 100 Excess value interest rate swaps, fair value hedges 21D 19 - Excess/less (-) value, loan hedges 21B (3) 5 Total derivatives, current assets 215 173

Non-current liabilities Less value interest rate swaps related to sale and leaseback 1 8 Total derivatives, non-current liabilities 1 8

Current liabilities Less value forward exchange contracts, cash flow hedges 1 103 102 Less value forward exchange contracts, fair value hedges 1 632 205 Excess/less value (-), loan hedges (3) 5 Total derivatives, current liabilities 2 732 312

B) Currency risk and hedging of currency

KONGSBERG’s currency risk and management is accounted for in Note 5 “Financial risk management objectives and policies”. KONGSBERG`s exposure to currency risk related to accounts receivable and payable in USD and EUR in the balance sheet, based on nominal amounts:

31 Dec 14 31 Dec 13 Amounts in mill. USD EUR USD EUR

Accounts receivable 256 75 137 58 Accounts payable (37) (11) (21) (9) Net balance sheet exposure 219 64 116 49

Forward exchange contracts fair value hedges 1) 1 399 192 940 275

1) According to KONGSBERG’s currency strategy, all contracts in functional currency are hedged.

The specified forward currency exchange contracts mentioned above are intended to hedge all contractual currency flows. This implies that in addition to hedging accounts receivable in foreign currency, the currency forwards will be used to hedge the invoicing remaining on signed contracts. KONGSBERG is also exposed to other currencies, but this is insignificant compared to the exposure in USD and EUR.

Significant foreign exchange rates applied in the consolidated financial statement during the year:

Average exchange rates Spot rates at 31 Dec 2014 2013 2014 2013

USD 6.30 5.88 7.42 6.07 EUR 8.36 7.81 9.02 8.36

56 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Currency hedging At 31 December, the Group had the following foreign currency hedges, by hedge category:

Gross value Average Average in NOK at Net excess(+)/ Total hedged hedged Total hedged hedged 2014 31 Dec 14 less(-) value amount in exchange amount exchange based on in NOK USD at rate in USD in EUR at rate in EUR Amounts in mill. hedged rates 31 Dec 14 31 Dec 14 31 Dec 14 31 Dec 14 31 Dec 14

Hedge category Forward contracts, cash flow hedges 1)2) 9 240 (1 031) 1 125 6.61 142 8.56 Total cash flow hedges 9 240 (1 031) 1 125 - 142 -

Forward contracts, fair value hedges 2)3) 10 532 (1 492) 1 399 6.37 192 8.71 Loan hedges (fair value hedges) 2) 1 133 (3) 122 7.40 3 9.10 Total 20 905 (2 526) 2 646 - 337 -

Gross value Avarage Average in NOK at Net excess(+)/ Total hedged hedged Total hedged hedged 2013 31 Dec 13 less(-) value amount in exchange amount exchange based on in NOK USD at rate in USD in EUR at rate in EUR Amounts in mill. hedged rates 31 Dec 13 31 Dec 13 31 Dec 13 31 Dec 13 31 Dec 13

Hedge category Forward contracts, cash flow hedges 1) 10 373 (37) 1 476 6.12 165 8.15 Total cash flow hedges 10 373 (37) 1 476 165

Forward contracts, fair value hedges 2)3) 8 496 (105) 940 6.06 275 8.28 Loan hedges (fair value hedges) 2) 728 5 106 6.12 1 8.38 Total 19 597 (137) 2 522 - 441 -

1) Changes in fair values associated with effective cash flow hedges are recognised in other comprehensive income. The part not considered to be an effective hedge is recognised through profit and loss. 2) The figures in the table linked to values based on agreed exchange rates and net fair values also include currencies other than USD and EUR. Loan hedges are currency hedges related to foreign currency loans. 3) The total change in value on hedged projects during 2014 is MNOK 1,387 (reduction of MNOK 663 in 2013). Derivatives used as project hedges have had corresponding negative values throughout the year, and the hedging has therefore been 100 per cent effective. Change in value is recognised in accounts receivable and construction contracts in progress (assets and liabilities).

In addition to the exchange rate on 31 December, the fair value of forward contracts is affected by interest rate differences in the currencies in question. The interest yield curves applied in the valuation are received from Reuters which retrieves data from a variety of market participants. More information is provided in Note 4 “Fair value” and Note 21G “Financial instruments - Assessment of fair value”.

Sensitivity analysis A strengthening of NOK against the USD and EUR at 31 December 2014 of 10 per cent (10 per cent in 2013) would have increased the statement of comprehensive income with the amounts included below. The analysis assumes that the other variables remain constant.

Estimated effect on other comprehensive income (after tax): Provided other variables remain constant, a corresponding weakening of NOK against USD and EUR would have the same MNOK 31 Dec 14 31 Dec 13 monetary effect, but with the sign reversed. Cash flow hedges are considered to be 100 per cent effective, USD 609 645 and all effects from a currency fluctuation will therefore be recog- EUR 94 99 nised in other comprehensive income. For fair value hedges, neither other comprehensive income, nor the profit and loss will be affected Total 703 744 as long as the hedges are 100 per cent effective. As KONGSBERG has a hedging strategy that generally hedges all contractual currency flows and receivables in foreign currency, foreign exchange fluctuations will not fully affect the profitability of contracts signed.

KONGSBERG • Annual Report and Sustainability Report 2014 57 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

C) Cash flow hedges

The periods in which cash flows related to derivatives that are cash flow hedges are expected to arise:

31 Dec 2014 31 Dec 2013 Expected Expected Carrying cash Carrying cash MNOK amount flow 2015 2016 2017 amount flow 2014 2015 2016

Forward exchange contracts Assets 71 72 69 3 - 65 65 54 11 - Liabilities (1 103) (1 121) (839) (282) - (102) (105) (71) (34) -

Interest swap agreements Assets - - - - - 3 3 1 1 1 Liabilities (12) (12) (5) (4) (3) - - - - - Total (1 044) (1 061) (775) (283) (3) (34) (37) (16) (22) 1

The periods in which cash flows related to derivatives that are cash flow hedges are expected to have an impact on the income statement:

31 Dec 2014 31 Dec 2013 Carrying Expected 2016 Carrying Expected 2015 MNOK amount cash flow 2015 and later amount cash flow 2014 and later

Forward exchange contracts Assets 71 72 36 36 65 65 37 29 Liabilities (1 103) (1 121) (563) (558) (102) (105) (59) (46)

Interest swap agreements Assets - - - - 3 3 1 2 Liabilities (12) (12) (4) (8) - - - - Total (1 044) (1 061) (531) (530) (34) (37) (21) (15)

Cash flow hedges - hedging reserve

MNOK 2014 2013

Opening balance (141) 191

Changes in excess/less value (-) during the period Forward exhange contracts and deferred gain/loss 1) (904) (428) Interest rate swaps (13) 4 Tax on items recognised directly in other comprehensive income 298 129

Recognised gain/loss during the period Forward exchange contracts and deferred gain/loss 1) (194) (37) Closing balance hedge reserve2) (954) (141)

If an expected contract becomes contractual and a fair value hedging is established, the recognised hedging reserve is transferred from the statement of comprehensive income to the carrying value of the hedged project. If an expected cash flow arises and does not result in a project hedging, the hedging reserve is recognised in the income statement together with the hedged transactions.

1) Deferred losses on cash flow hedges represent MNOK 263 at 31 December 2014 (losses amounting to MNOK 161 at 31 December 2013) allocated to projects. The gains/losses arise when the forward contracts relating to the cash flow hedges are realised and new forward contracts are established for the projects. Any incurred gain/ loss is deferred and realised in line with the progress of the project. 2) The net effect of cash flow hedging before tax, recognised in other comprehensive income, represents MNOK -1,111 in 2014 (MNOK -461 in 2013).

58 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

D) Interest rate risk on loans

2014 2013 Nominal Nominal interest Years Nominal Carrying interest Years Nominal Carrying Amounts in MNOK Due date rate to maturity amount amount Due date rate to maturity amount amount

Bond issue KOG 07 11.9.19 4.80% 4.7 250 250 10.9.19 4.80% 5.7 250 250 Bond issue KOG 06 11.9.17 3.28% 2.7 500 500 10.9.17 3.46% 3.7 500 500 Other long-term loans 104 104 61 61 Total long-term loans 1) 854 854 811 811 Bond issue KOG 05 14.4.14 5.44% 0.28 500 500 Other short-term loans - - 26 26 Total loans 854 854 1 337 1 337 Credit facility (not utilised) 7.4.19 1 500 1.7.15 1 000

1) The deviation between the carrying value in the consolidated statement of financial position and amounts in this note is due to the excess value of the interest rate swap related to bond issue KOG 07 of MNOK 19. See table below (interest rate swaps).

In 2014, Kongsberg Gruppen ASA established a new syndicated credit facility with Danske Bank, DNB, JP Morgan Chase, Nordea and SEB. The facility is for general business purposes. The new facility has a term of five years with an option to extend by one year, twice. The interest rate is NIBOR + a margin that depends on the ratio between net interest-bearing loans/EBITDA and can vary from 0.5 per cent to 1 per cent. The credit facility requires that net interest-bearing debt shall not exceed three times the EBITDA, but can be up to 3.5 times the figure for a maximum of three quarters. The covenants in the loan agreements are met. The facility was undrawn in 2014. Kongsberg Gruppen ASA had three bond loans at the beginning of 2014, of which one loan of MNOK 500 was due in April 2014. The bond loans were issued in NOK and are listed on the Oslo Stock Exchange. The interest is 3 month NIBOR + 1.8 per cent for loans of MNOK 500 with maturity in 2017 and a fixed interest of 4.80 per cent for bond loans of MNOK 250 with maturity 2019. The loans are capitalised at their amortised cost using the effective interest method. Other loans comprise minor debts incurred directly by individual subsidiaries in local banks.

Interest rate swaps Excess(+)/ Excess(+)/ Amount less value(-) Amount less value(-) Amounts in MNOK Due date Interest rate 2014 31 Dec 14 2013 31 Dec 13

Interest rate swaps, floating to fixed rate1) 2.1.15 3.43% 150 (1) 150 (3) Interest rate swaps, floating to fixed rate1) 2.1.15 3.21% 120 - 120 (2) Interest rate swaps, floating to fixed rate2) 2.1.18 2.47% 247 (11) 247 (3) Total interest rate swaps, floating to fixed rate 517 (12) 517 (8) Interest rate swaps, fixed to floating rate3) 11.9.19 4.80% 250 19 250 3 Total interest rate swaps 767 7 767 (5)

1) KONGSBERG has entered into swap agreements from floating to fixed interest for a nominal amount of MNOK 270. The agreements were made in connection with tenancy agreements signed in connection with the sale and leaseback agreements as mentioned in Note 27 “Sale and leaseback”. The change in value on interest rate swaps is recognised in other comprehensive income. 2) KONGSBERG has entered into swap agreements from floating to fixed interest for a nominal amount of MNOK 247. The agreement was made in connection with financing the real estate business to reduce interest exposure. The change in value on the swap agreement is recognised in other comprehensive income. 3) KONGSBERG has entered into two interest swap agreements from fixed to floating interest for a nominal amount of MNOK 125 each. The agreements were made in connection with the bond issue KOG 07, which is a fixed rate loan. The change in value on the interest rate swaps is adjusted against the carrying value of the loan.

KONGSBERG • Annual Report and Sustainability Report 2014 59 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Sensitivity analysis interest rate risk A change in the interest rate of 50 basis points (bp) on the date of the balance sheet would have increased (decreased) the profit for the year and equity by the amounts shown in the table. The analysis assumes that other variables remain constant. The analysis was performed on the same basis in 2013.

Effect of interest rate increase of 50 bp: MNOK 31 Dec 14 31 Dec 13

Investments with floating interest rates 11 8 Loans with variable interest rates (3) (5) Interest rate swap agreements, floating to fixed rate 4 7 Cash flow sensitivity (net) 12 10

Such an increase in interest rate would also have increased (decreased) other comprehensive income and equity by MNOK 5 (MNOK 6 in 2013) related to interest rate swap agreements from fixed to floating rate.

E) Liquidity risk

The table shows due dates under the terms of contract for financial liabilities, including interest payments. Liabilities such as public taxes/ duties and income taxes are not financial liabilities and therefore not included. The same applies to pre-payments from customers and the accrual of projects.

31 Dec 2014 Carrying Contractual 2019 MNOK amount cash flows 2015 2016 2017 2018 and later

Financial liabilities that are not derivatives Unhedged bond loans 750 (860) (29) (29) (523) (12) (267) Other loans and non-current liabilities 104 (104) (21) (21) (21) (21) (20) Accounts payable 1 057 (1 057) (1 057) - - - -

Financial obligations that are derivatives Currency derivatives 2 735 (2 890) (1 822) (1 053) (13) (1) (1) Interest rate swaps 12 (12) (5) (4) (3) - - Total 4 658 (4 923) (2 934) (1 107) (560) (34) (288)

31 Dec 2013 Carrying Contractual 2018 MNOK amount cash flows 2014 2015 2016 2017 and later

Financial liabilities that are not derivatives Unhedged bond loans 1 250 (1 398) (537) (29) (29) (524) (279) Other loans and non-current liabilities 87 (87) (74) (1) (1) (10) (1) Accounts payable 834 (834) (834) - - - -

Financial obligations that are derivatives Currency derivatives 307 (315) (213) (94) (6) (2) - Interest rate swaps 8 (8) (6) (1) (1) - - Loan hedges 5 (5) (5) - - - - Total 2 491 (2 647) (1 669) (125) (37) (536) (280)

60 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

F) Summary of financial assets and liabilities

Financial assets and liabilities broken down into different categories for accounting purposes at 31 December 2014:

Derivatives 2014 Derivatives that do not Available- Other used for qualify for Loans and for-sale financial Fair MNOK Note hedging hedging receivables shares liabilities Total value

Assets – fixed assets Investment in available-for-sale shares 17 - - - 132 - 132 132 Other non-current assets 18 - - 100 - - 100 100

Assets – current assets Derivatives 21A 215 - - - - 215 215 Receivables 19 - - 3 284 - - 3 284 3 284 Cash and cash equivalents 22 - - 4 424 - - 4 424 4 424

Financial liabilities – non-current Interest-bearing loans 21D - - - - 854 854 866 Derivatives 21A - 1 - - - 1 1 Other non-current liabilities - - - - 19 19 19

Financial liabilities – current Interest-bearing loans ------Derivatives 21A 2 732 - - - - 2 732 2 732 Accounts payable 25 - - - - 1 057 1 057 1 057

Derivatives 2013 Derivatives that do not Available- Other used for qualify for Loans and for-sale financial Fair MNOK Note hedging hedging receivables shares liabilities Total value

Assets – fixed assets Investment in available-for-sale shares 17 - - - 140 - 140 140 Other non-current assets 18 - - 155 - - 155 155

Assets – current assets Derivatives 21A 173 - - - - 173 173 Receivables 19 - - 2 996 - - 2 996 2 996 Cash and cash equivalents 22 - - 3 272 - - 3 272 3 272

Financial liabilities – non-current Interest-bearing loans 21D - - - - 811 811 846 Derivatives 21A - 8 - - - 8 8 Other non-current liabilities - - - - 56 56 56

Financial liabilities – current Interest-bearing loans - - - - 526 526 527 Derivatives 21A 312 - - - - 312 312 Accounts payable 25 - - - - 834 834 834

KONGSBERG • Annual Report and Sustainability Report 2014 61 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

G) Assessment of fair value

The following table illustrates the Group’s assets and liabilities measured at fair value:

2014 2013 MNOK Note Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

Assets Investments in available-for-sale shares 17 101 - 31 62 - 78 Derivative financial assets 21A 215 - 173 - Total assets at fair value 101 215 31 62 173 78

Liabilities Derivative financial liabilities 21A - 2 733 - - 320 - Interest-bearing debt (calculated for note purposes) - 866 - - 1 373 - Total liabilities at fair value - 3 599 - - 1 693 -

The different levels are defined as follows: Level 1: Fair value is measured by using quoted prices in active markets for identical financial instruments. No adjustments are made related to these prices. Level 2: Fair value is measured based on other data than traded prices as described for level 1, but that are from observable market data either directly or indirectly. These reserves entail some valuation uncertainty. Level 3: Fair value is measured using models that are mostly not based on observable date. This entails considerable uncertainty regarding determination of fair value.

See also Note 4 “Fair value” and Note 17 “Available-for-sale shares” for information on the measuring of fair value.

H) Estimation uncertainty

KONGSBERG has a number of financial instruments recognised at likely that observable market inputs and assumptions will change fair value. When market prices cannot be observed directly through over time. Such changes may affect the calculated values of quoted prices, fair value is estimated by using various models based financial instruments significantly, and result in gains and losses with on internal estimates or input from banks or other market impact on the income statement in future periods. How these participants. Assumptions for such valuations include spot prices, changes will affect the income statement depends on the type of forward rates and yield curves. The assessments are always based instrument, and whether it is part of a hedging relation. on KONGSBERG`s own critical judgement, but it is nevertheless

22 Cash and cash equivalents

Nominal amounts in MNOK 31 Dec 14 31 Dec 13

Short-term investments in the money market 2 116 880 Bank deposits, operating accounts 2 308 2 392 Total 4 424 3 272

Bank guarantees amounting to MNOK 280 (MNOK 281 in 2013) have been furnished for funds related to withholding tax for employees. The Group’s liquidity management is handled by the Group’s corporate treasury unit.

62 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

23 Share capital

Share capital At 31 December 2014, the Group’s share capital consisted of 120,000,000 shares with a nominal value of NOK 1.25.

Development in share capital Number of Nominal value Amounts Adjustment Share capital Date shares NOK in MNOK factor in MNOK

Type of change Stock Exchange listing 13 Dec 93 5 850 000 20 117 117 Private placement with employees 1996 6 000 000 20 3 120 Share split 1997 24 000 000 5 01:04 120 Share issue 1999 30 000 000 5 30 150 Share split 2009 120 000 000 1.25 01:04 150

The largest shareholders at 31 December 2014 Shareholders, by size of holding

Number Number Antall Number Holding Shareholders of shares Stake of owners eiere of shares %

The Norwegian State, represented 1–1 000 5 912 1 710 537 1.43% by the Ministry of Trade, 1 001–10 000 1 842 4 685 267 3.90% Industry and Fisheries 60 001 600 50.001% 10 001–100 000 189 5 020 148 4.18% Arendals Fossekompani ASA 9 552 796 7.961% 100 001–1 000 000 59 14 794 991 12.33% The National Insurance Fund 7 338 325 6.115% 1 000 001–10 000 000 11 33 787 457 28.16% MP Pensjon 4 742 800 3.952% Over 10 000 000 1 60 001 600 50.00% The Northern Trust Co 2 471 860 2.060% Total 8 014 120 000 000 100.00% J.P. Morgan Chase Bank N.A. London 1 878 330 1.565% Danske Invest Norske Instit. II 1 809 696 1.508% At 31 December 2014, 976 of the 8,014 shareholders were Odin Norden 1 592 821 1.327% foreigners, and they owned a total of 13.14 per cent of the shares. Reassure Limited 1 178 300 0.982% Odin Norge 1 152 181 0.960% Total 91 718 709 76.432% Other (stake < 0.75% ) 28 281 291 23.568% Total number of shares 120 000 000 100.000%

Treasury shares Dividend

KONGSBERG held 26,674 treasury shares at year-end 2014. 2014 2013 The shares were purchased in accordance with the authorisation granted by the Annual General Meeting, authorising the repurchase Dividend paid in MNOK1) 630 450 of up to five per cent of the shares outstanding. Divident paid in NOK per share 5.25 3.75

Number 1) Of this MNOK 2 is paid to treasury shares.

Number of treasury shares at 31 December 2013 66 699 Purchase of treasury shares 473 479 The Board has proposed dividends amounting to MNOK 1,110 for 2014. This is equivalent to NOK 9.25 per share, of which NOK 4.25 Treasury shares conveyed to employees 513 504 is ordinary and NOK 5.00 is extraordinary. Number of treasury shares at 31 December 2014 26 674

KONGSBERG • Annual Report and Sustainability Report 2014 63 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

24 Provisions

Non-current provisions Current provisions

MNOK Sale and leaseback MNOK Warranty Other Total

1 January 2014 116 1 January 2014 665 288 953 Provision 68 Provision 342 88 430 Effect of discounting (3) Reversed (332) (45) (377) Reversed (8) Utilised provision (136) (45) (181) Utilised provision (20) 31 December 2014 539 286 825 31 December 2014 153

Non-current provisions Other provisions KONGSBERG has, in the period from 1999 to 2014, sold properties Provisions are recognised when the Group has an obligation as in the Kongsberg Technology Park. The properties have been leased a result of a past event, it is probable that there will be a financial back on long-term leases, of which one expired in 2014 and the rest settlement as a result of this commitment, and the size of that expire in the period 2017 to 2031. In connection with sale and lease-­ obligation can be measured reliably. back, it was agreed that KONGSBERG will guarantee for construc- Provisions apply to circumstanses where there is a disagreement tion costs and maintenance of the buildings during the leaseback between contracting parties, uncertainty in relation to the warranty, period. The current value of future guarantee liability has been or products that are early in their life cycles. provided for in the financial statements. In addition, provision has been made related to lease expiration. The remaining provision is Estimation uncertainty subject to annual reviews. The effect on discounting has been The assessments are based on a combination of actual figures, recognised as financial expenses. technical considerations and judgement. The estimates are updated on a quarterly basis. There is considerable uncertainty related to Provisions for warranties these provisions as to amount and time. Provisions for warranties are provisions for warranty costs on completed deliveries. Unused warranty provisions are reversed when the warranty period expires. Warranty provisions are estimat­ ed based on a combination of empirical data, specific calculations and judgement. Warranty periods vary from one to two years within Kongsberg Maritime and Kongsberg Oil & Gas Technologies. For Kongsberg Defence Systems and Kongsberg Protech Systems, the warranty periods normally last from one to five years, but for Kongsberg Defence Systems they can be as long as 30 years under certain circumstances.

25 Other current liabilities

Other current liabilities

MNOK 31 Dec 14 31 Dec 13

Accounts payable 1 057 834 Public duties payable 303 387 Income tax payable 29 16 Accrued holiday pay 423 412 Prepayments from customers on delivery projects 455 250 Liabilities related to performance-based salary 128 136 Other 1 554 1 655 Total 3 949 3 690

64 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

26 Assets pledged as collateral and guarantees

Assets pledged as collateral The Group’s loan contracts, i.e. the bond loan agreements and the agreement on syndicated credit facilities, are based on negative pledges.

Prepayment and completion guarantees The group companies have provided guarantees for prepayments and completion in connection with projects. The guarantees are issued by Norwegian and foreign banks and insurance companies and by Kongsberg Gruppen ASA (parental guarantees). Kongsberg Gruppen ASA is responsible for all guarantees.

MNOK 31 Dec 14 31 Dec 13

Guarantees issued by banks and insurance companies 3 109 2 261 Guarantees issued by Kongsberg Gruppen ASA (parent company) 5 560 1 671 Prepayments from and completion guarantees to customers 8 669 3 932

Kongsberg Gruppen ASA has non-committed framework agreements for guarantees with banks and insurance companies.

27 Sale and leaseback

During the period from 1999 to 2014, KONGSBERG sold properties In addition to lease payments, KONGSBERG is responsible for in Kongsberg Technology Park. The properties have been leased certain expenses related to taxes and maintenance of the back on long-term leases, of which one contract expired in 2014 and properties. With the exception of the properties sold in 2007 and the other expire from 2017 to 2031. The leasebacks are classified as 2014, the properties are mainly leased to external tenants. The operating leasing agreements. leases have durations ranging from three months to 15 years. Provisions related to the sale and leaseback agreements are discussed in Note 24 “Provisions”.

Annual Lease Lease Lease Weighted lease payments payments Remaining payments average Year of payments 2016 later than term of sublease subleasing MNOK disposal 2015 –2020 2020 lease 2015 period

Contract 1 – A total of 28 000 m2 industrial/office1) 1999 Contract 2 – A total of 38 000 m2 industrial/office 2001 36 112 - 4 years 39 3 years Contract 3 – A total of 6 000 m2 industrial/office 2002 6 10 - 3 years 7 2.5 years Contract 4 – A total of 10 000 m2 industrial/office 2006 18 94 13 7 years 19 7 years Contract 5 – A total of 39 000 m2 industrial/office 2007 58 309 270 10 years 58 10 years Contract 6 – A total of 34 000 m2 parking/office2) 2014 12 150 280 17 years 13 9 years Total 130 675 563 136

1) Agreement expired in 2014 2) The leases run from completion of the buildings. See also Note 7 “Sale of property.”

For Contracts 3, 4 and 5, the Group has pre-emptive rights based Contract 6 was signed in connection with the completed property on market conditions. The Group has the right to extend all leases sale in 2014. The lease consists of three buildings, of which two are for at least five years at a time. The lease payments are fixed by a parking buildings, and the lease payments are adjusted annually 2.5 per cent annual adjustment for Contracts 2 and 3. Contracts 4, based on the consumer price index. The Group has the right to 5 and 6 are adjusted with 100 per cent of the change in the extend the term of the lease for five years at a time on existing consumer price indect, which is assumed to be 2 per cent annually. terms. Subleasing agreements were signed for the leasing period The lease payment is adjusted annually based on the consumer for both external and in-house lessees. See also Note 7 “Sale of price index. property” and Note 24 “Provisions.

KONGSBERG • Annual Report and Sustainability Report 2014 65 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

28 Statement on the remuneration of the Group CEO and Executive Management

Statement on the remuneration of the Group CEO and performance-based salary as well as the share program. Regular Executive Management surveys are made of relevant markets to ensure that overall com- The Board proposes that the following guidelines be applied for pensation packages are competitive, but not leading. 2015 and until the Annual General Meeting in 2016. Basic salary Main principles of the company’s remuneration policy for the The basic salary should normally be the main element of the Group CEO and Executive Management managers’ remuneration. It is generally considered once a year. The principles and systems for remuneration of executive manage- ment are adopted by the Board. Each year, the Board of Directors Regular benefits in kind assesses the CEO’s remuneration and conditions, as well as the Key management personnel will normally be offered the benefits in Group’s performance-based salary plan for executives. The Board’s kind that are common for comparable positions, e.g., free telephone Compensation Committee prepares the cases on the agenda for service, free broadband service, newspapers, company car/car the Board of Directors. The CEO determines the compensation for arrangement and parking. No particular limitations have been placed the other members of corporate management in consultation with on the type of benefits in kind that can be agreed. the Chairman of the Board. Management remuneration at Kongsberg Gruppen ASA and Group companies (“KONGSBERG”) Pension plans are based on the following main principles: Key management personnel shall normally have pension plans that • Management remuneration shall be competitive, but not leading, guarantee pensions proportional to their salary level. Generally, this and thus support a general moderation with regards to the is satisfied by membership in KONGSBERG’s collective main development of the management remuneration – the company pension plan for salaries of up to 12G. aspires to attract and retain skilled leaders. The Group’s collective main pension plan is a defined contribution • Management remuneration shall motivate, i.e., be structured to plan. The contributions are 0 per cent of salaries between 0G and motivate managers to strive to achieve constant improvements 1G, 5 per cent of salaries from 1G to 6G and 8 per cent of salaries in operations and the company’s results. from 6G to 12G. The assets can be invested in one of three savings • The remuneration system shall be understandable and acceptable portfolio options, consisting of 30, 50 or 80 per cent shares, both inside and outside of KONGSBERG. respect­ively. The plan was introduced on 1 January 2008. Employ- • The remuneration system shall be flexible and open to adjust- ees aged 52 or older at the time of transition remained in a closed ments when requirements change. defined benefit pension plan. • The remuneration system shall encourage cooperation. Managers with a basic salary in excess of 12G also earn pensions Compensation to corporate management shall reflect their on the component of their salaries that exceeds 12G through an responsibility for the management, performance and sustainable un­funded contribution plan. The contribution is 18 per cent of the development of KONGSBERG, and take into account the size basic salary exceeding 12G, and the investment options are the and complexity of the business. The arrangements shall otherwise same as for the main pension plan. This plan will be adapted for be trans­parent and in line with the principles for good corporate new executive management to the new guidelines from the Ministry governance. in 2015. Other companies in the Group shall comply with the main There is an upper limit on maximum pensionable income of principles of the senior executive remuneration policy. One of the NOK 3,056,049. The figure is adjusted for inflation in line with the goals is to coordinate remuneration policy in the Group and the consumer price index on 1 January of every year. No member of schemes used for variable benefits. group management is covered by the old plans, and everybody is Effective from 13 February 2015, the Ministry of Trade, Industry now part of the company’s contribution plan. The CEO has a and Fisheries stipulated new guidelines for wages and other remu- separate agreement for retirement at the age of 67, which, including neration for executive employees in enterprises and companies with the National Insurance Scheme (based on full accrual), and a government-owned interest. These deviate in important points KONGSBERG’s mandatory service pension will provide a benefit of from corresponding previous guidelines, e.g. for long-term incentive NOK 1,496,881 per year from the age of 67 to 77, and then NOK (LTI), but particularly for pensions, where the State does not want 1,247,401 each year for the rest of his/her life. The amounts are earning of pension benefits beyond a wage basis of 12G (pt approx. adjusted annually in line with benefits paid from the National NOK 1.1 million). However, the new guidelines will not be effective Insurance Plan, i.e., to date with general salary increases less retroactively, i.e., agreements entered into before 13 February 2015 0.75 per cent. can be continued. Through 2015, the Board will assess how to KONGSBERG’s scheme with early retirement agreements for implement the new guidelines for executive employees starting ex­ecutives has not been continued for executives hired after 1 July positions after 13 February 2015. 2013. These individuals will instead receive an additional contribution of 12 per cent of the basic salary in excess of 12G to the unfunded Elements of management remuneration – fixed salary pension scheme, as long as they are employed, but only until the and variable benefits age of 65 at the latest. This scheme for executive employees will The basis for wage setting is the aggregate level of a manager’s also be adapted to the mentioned guidelines from the Ministry regular salary and variable benefits. The fixed salary comprises in 2015. a basic salary plus regular benefits in kind and post-employment The company has previously made agreements on early retire- benefit plans. As of 2012, the Board decided to introduce LTI as ment for some of its leaders, in line with the State’s Ownership part of the fixed remuneration. Variable benefits consist of Report. The agreements vary, depending when they were made.

66 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

The newest allows for a retirement from the age of 65, but with a account, however maximum 50 per cent of basic salary, and will be mutual right for KONGSBERG and the member of group manage- paid next year when the annual accounts for the year in question ment to demand early retirement from the age of 63. The benefit have received final approval from the Board. equals 65 per cent of the annual salary, based on a minimum of 15 Changes in the year’s EBITA, adjusted for 10 per cent calculated years of accrual. If the employee resigns between ages 63 and 65, interest rate on change in capital, is the most significant parameter the pension earnings will be reduced compared with the defined of the performance-based salary. The measurement is weighted contribution pension that applies from the age of 67. These agree- for a manager’s own area of responsibility and higher levels. ments concern six members of group management. One member of Performance-based salary is positive if the adjusted EBITA shows corporate executive management has an older agreement releasing progress, whereas a decrease in adjusted EBITA can be negative him from the obligation to work from the age of 60. Providing a and reduce the balance in the performance-based salary account. vested period of at least 10 years, the benefit is 90 per cent of the Annual contribution to the account cannot exceed a maximum salary from the age of 60, reduced by 10 per cent per year to 60 per of 75 per cent of the basic salary. For those covered by the LTI cent of the salary from ages 63 to 67. Similarly, three other execu- scheme, the maximum is 60 per cent of the basic salary. The tive vice presidents have agreements that allow retirement from the balance of the account will not be paid out in the event of a age of 62. With a vested period of at least 15 years, the benefit will resig­­­­nation from the Group prior to retirement. The account has an be 65 per cent of the salary up to the age of 67. These older plans equalising effect over time, en­cour­ages a long-term perspective and were terminated in 2006 and 2008, respectively. The CEO has a ensures that the participants have not only an upside, but also a contract for early retirement with NOK 1,746,361 per year from the downside. age of 65 to 67. The CEO and KONGSBERG can reciprocally call The performance-based salary provides no basis for pension for retirement with severance pay from the age of 63 or 64, based and is annually assessed by the Compensation Committee and the on a compensation of NOK 1,621,621 or NOK 1,683,991 per year, Board of Directors to make sure that it works as intended and the respectively, up to the age of 65. The amounts are adjusted for required adjustments are made. The plan will be continued in 2015, annually in line with benefits paid from the National Insurance Plan. and will be assessed vis-a-vis the new guidelines from the Ministry All figures are applicable at 31.12.14. of Trade, Industry and Fisheries.

Long-term incentive (LTI) Compensation linked to shares or to the development of From 2012, the Board implemented, as a part of the fixed remunera- the share price tion, a long-term incentive in the form of a compensation of 25 per Key management personnel have the opportunity to participate fully cent and 15–20 per cent of annual basic salary, for the CEO and in KONGSBERG’s discounted employee share program on the same other members of the corporate management, respectively. The terms as all Group employees. KONGSBERG has no arrangement first payment was made in 2013. The reason for this scheme is to for the allocation of share options or other instruments associated ensure competitiveness with comparable companies. A condition for with the company’s shares. There are no plans to introduce such such payments is that KONGSBERG had a positive operating profit arrangements. (EBIT) in the previous year. Participants in the plan will be obliged to invest the net amount after tax in Kongsberg shares, purchased in Severance package arrangements the market and held in a period of three years. If participants leave In order to satisfy KONGSBERG’s continuous need to ensure that the company on their own initiative, they have to repay an amount the composition of management is in accordance with the require- equal to equity value after tax on termination date for all shares that ments of the business segments, agreements regarding severance do not meet the three-year requirement. The plan will not provide a package arrangements have and can be made. The severance basis for pension benefits. For those covered by the plan, the arrangements have been designed in a manner that should be annual maximum accrual of salary is reduced from 75 per cent to per­ceived to be acceptable both internally and outside the company. 60 per cent of the basic salary. Agreements made from 2011 do not give the right to severance pay The LTI plan will be subject to an evaluation and will be adapted that in value exceed salary and benefits for more than 6 months. to the new guidelines from the Ministry of Trade, Industry and This scheme will be carried forward in 2015. Before 2011, severance Fisheries in 2015. package arrangements gave up to 12 months’ severance pay. Such agreements have been signed for the corporate EVPs under the Performance-based salary framework of the Working Environment Act. The CEO has an KONGSBERG’s top executives and most important decision-makers­ agreement that accommodates KONGSBERG’s need to ask shall in a direct manner have financial incentives linked to the CEO to leave immediately if that is considered to be in KONGSBERG’s development and improvement. For this purpose, KONGSBERG’s best interests. Beyond the reciprocal six-month the Board adopted in 2006 a performance-based plan that covers period of notice, the CEO can receive full payment until accepting approx. 90 managers. The plan is carried forward in 2014. The plan a new position, if relevant, limited up to 12 months and provided is designed for the purpose that managers who perform well over that it is KONGSBERG that asks for the CEO’s resignation. time will earn an average performance-based salary of 20–30 per cent of their basic salary. Statement for fiscal year 2014 The performance-based salary plan is based on three independ- The executive compensation policy for the fiscal year 2014 has been ent components – change in EBITA, operating EBITA margin implemented in accordance with the above-mentioned information achieved (if more than 10 per cent) and personal, non-financial and the guidelines discussed at KONGSBERG’s Annual General targets. The performance-based plan distinguishes between per­ Meeting in 2014. formance to be credited or charged to a performance salary bank Following the ordinary wage settlement on 1 July 2014, the CEO’s account for the individual participant and paid performance-based basic salary was adjusted up by 3 per cent to NOK 3,966,000 a year salary to be paid from the bank. Earned performance-based salary (3.5 per cent in 2013). For the rest of corporate management, the constitutes 1/3 of the balance in the performance-based bank basic salary was adjusted up by an average of 3 per cent in 2014

KONGSBERG • Annual Report and Sustainability Report 2014 67 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

(4.9 per cent in 2013). In addition, there is the performance-based 2013, equivalent to 15 per cent). During 2014, MNOK 21 was paid, salary as described above. excluding social security tax, equivalent to 15 per cent of total salary In the consolidated financial statements for 2014, the earned for the participants of the arrangement (MNOK 24 for 2013, performance-­based salary for executive management constitutes equivalent to 19 per cent). KONGSBERG has not made or amended MNOK 24, exclusive of social security tax, equivalent to 18 per cent any agreements for compensation with material impact on of total salary for the participants of the arrangement (MNOK 21 in KONGSBERG or the shareholders in the previous financial year.

29 Compensation for Executive Management and the Board of Directors

Compensation, specified for the members of the Executive Management for 2014 and 20131)

Other Earned per­- Shares Total benefits formance- related number reporting Earned based salary to the of shares Paid salary during the long-term during the Pension Balances Long-term long-term including including accounting incentive accounting earning for on car incentive incentive LTI Amounts in NOK thousand Year holiday pay year2) plan (LTI)3) year4) the year loans plan (LTI)5) plan (LTI)6) 31 Dec

Walter Qvam, Group CEO 2014 3 942 223 631 694 2 401 - 992 3 707 13 626 2013 3 823 314 310 703 2 108 - 962 4 110 9 654 Hans-Jørgen Wibstad, CFO 2014 2 362 209 227 240 601 - 356 1 330 3 813 2013 2 300 215 112 357 642 - 346 1 482 2 218 Johnny Løcka, EVP, Corporate 2014 1 708 304 164 319 267 362 257 961 3 602 functions 2013 1 657 305 81 338 293 429 250 1 072 2 376 Hilde Øygarden, EVP, 2014 1 380 222 132 271 172 303 208 777 6 281 Strategy and analysis 2013 1 334 218 65 278 171 363 202 861 5 239 Lene Svenne, 2014 1 486 213 72 136 330 - 224 837 2 406 Corporate compliance officer 2013 1 418 191 - 201 336 - 217 - 1 304 Even Aas, EVP, Public Affairs 2014 1 511 289 144 319 194 - 228 850 13 382 2013 1 457 297 71 347 189 - 221 939 12 267 Egil Haugsdal, EVP, 2014 2 332 359 260 518 708 579 351 1 313 13 454 Business Development 2013 2 255 365 146 587 739 649 341 1 940 11 876 Hege Skryseth, EVP, 2014 1 822 165 - 336 593 602 294 - 265 from 1 January 2014

Geir Håøy, CEO, Kongsberg Maritime 2014 2 361 227 292 720 577 - 471 1 760 4 859 2013 2 279 428 140 409 573 - 457 1 856 2 834 Harald Ånnestad, CEO, 2014 2 291 315 291 810 790 293 460 1 720 7 794 Kongsberg Defence Systems 2013 2 217 297 142 589 787 355 446 1 889 5 809 Espen Henriksen, CEO, 2014 2 053 273 134 - 449 - 414 1 548 2 949 Kongsberg Protech Systems 2013 1 921 230 - 299 410 - 402 - 1 136 Pål Helsing, CEO, 2014 2 336 149 224 - 549 522 351 1 312 2 773 Kongsberg Oil & Gas Technologies 2013 2 265 473 110 249 590 581 341 1 461 1 461

1) Compensation and other benefits to members of Executive Management are based on their time served as part of corporate management. 2) Benefits other than cash refers to expensed discounts on shares in connection with the share program for all employees, telephone/broadband, car arrangements and compensation for the taxable share of pensions and insurance, as well as other taxable benefits. 3) 2013 was the first year that the LTI was disbursed. Accrued LTI including tax compensation is accrued in the accounts according to IAS19 on a linear basis over three years since the shares can be managed freely only after three years. A statement on the LTI scheme is provided in Note 28. 4) Earned performance-based part of salary in the accounting year accounted for 1/3 of the balance in the performance-based salary account, incl. holiday pay and is disbursed when the financial statements for the relevant year have been approved by the Board. A statement on performance-based pay is provided in Note 28. 5) LTI with tax compensation for disbursement the following year where the net amount will be invested in KONGSBERG shares. A statement on the LTI scheme is provided in Note 28. 6) Shares acquired in the accounting year associated with the LTI scheme.

68 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Shares owned by, and compensation to the members of the Board of Directors

Compensa- The Board Fixed board tion for Total Number Number compensa- committee compensa- of board Amounts in NOK thousand Year of shares tion meetings tion meetings2)

(through the company Finn Jebsen, Chairman of the Board 2014 20 000 414 000 19 000 433 000 10 Fateburet AS) (through the company 2013 20 000 399 333 36 200 435 533 9 Fateburet AS) Anne-Lise Aukner, Member of the Board, Deputy Chair 2014 - 227 333 53 000 280 333 9 2013 - 219 333 51 000 270 333 8 Roar Marthiniussen, Member of the Board 2014 5 269 207 000 16 600 223 600 10 2013 5 004 199 667 31 400 231 067 9 Helge Lintvedt, Member of the Board 2014 - 207 000 46 500 253 500 10 2013 - 199 667 27 000 226 667 9 Irene Waage Basili, Member of the Board 2014 - 207 000 - 207 000 10 2013 - 199 667 - 199 667 9 Roar Flåthen, permanent Deputy Member of the Board 2014 - 207 000 16 600 223 600 10 from 1 May 2012, Member of the Board from 3 May 2013 20133) - 103 714 24 000 127 714 7 Magnar Hovde, Member of the Board from 3 May 2013 2014 80 207 000 - 207 000 10 2013 80 134 667 - 134 667 6 Morten Henriksen, Member of the Board from 3 May 2013 2014 - 207 000 46 500 253 500 10 2013 - 134 667 27 000 161 667 6 (owned personally through Erik Must1), Member of the Board until 3 May 2013 2013 524 600 65 000 7 400 72 400 3 the company Must Invest AS) John Giverholt, Member of the Board until 3 May 2013 2013 3 200 65 000 29 700 94 700 3 Kai Johansen, Member of the Board until 3 May 2013 2013 - 65 000 26 100 91 100 3 Total compensation to the Board 2014 1 883 333 198 200 2 081 533 Total compensation to the Board 2013 1 785 715 259 800 2 045 515

1) Erik Must is the chairman of the Board of Arendals Fossekompani ASA, which owns 9,552,796 shares in Kongsberg Gruppen ASA. 2) 10 board meetings were held in 2014 (9 board meetings in 2013) 3) In the period 1 May 2012 to 2 May 2013, Roar Flåthen was a permanent deputy member of the Board. By own request, he has declined compensation for meetings beyond those he has participated in. This has been settled by NOK 95,953 against board compensation for 2013.

30 Auditors’ fees

2014 2013 Sub- Sub- Sub- Sub- Parent sidiaries sidiaries Total Parent sidiaries sidiaries Total NOK thousand company in Norway abroad 2014 company in Norway abroad 2013

Group auditor EY Statutory audit 860 6 351 2 383 9 594 828 6 292 1 895 9 015 Other assurance services 84 213 - 297 166 160 - 326 Tax consultancy 1 777 81 1 692 3 550 1 112 287 1 452 2 851 Other services outside the audit 3 799 - - 3 799 813 740 587 2 140 Total fees, EY 6 520 6 645 4 075 17 240 2 919 7 479 3 934 14 332

Other auditors Estimated audit fees 36 1 919 1 955 - 200 1 450 1 650

KONGSBERG • Annual Report and Sustainability Report 2014 69 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

31 List of Group companies

The following companies have been consolidated:

Country Stake at Stake at Country Stake at Stake at Name of company of origin 31 Dec 14 31 Dec 13 Name of company of origin 31 Dec 14 31 Dec 13

Kongsberg Gruppen ASA Norway Parent Parent Kongsberg Norcontrol IT Ltd. The UK 100 100 Kongsberg Defence & Kongsberg Maritime Aerospace AS Norway 100 100 Holding Ltd. The UK 100 100 Kongsberg Spacetec AS Norway 100 100 Kongsberg Maritime Ltd. The UK 100 100 Kongsberg Satellite Equity Simrad Leasing Ltd. The UK 100 100 Services AS Norway method 50 Kongsberg Oil & Gas Kongsberg Norspace AS Norway 100 100 Technologies Ltd. The UK 100 100 Kongsberg Oil & Gas Kongsberg GeoAcoustics Ltd. The UK 100 100 Technologies AS Norway 100 100 Kongsberg Hungaria Kft. Hungary 100 100 Kongsberg Teknologipark AS Norway 100 100 Kongsberg Maritime Hellas SA Greece 100 100 Kongsberg Næringseiendom AS Norway 100 100 Kongsberg Maritime Tech LLC Russia 100 100 Kongsberg Kongsberg Gallium Ltd. Canada 100 100 Næringspark­utvikling AS Norway 100 100 Kongsberg Maritime Kongsberg Næringsbygg 2 AS Norway 100 100 Simulation Ltd. Canada 100 100 Kongsberg Næringsbygg 3 AS Norway 100 100 Kongsberg Maritime Ltd. Canada 100 100 Kongsberg Næringsbygg 5 AS Norway 100 100 Kongsberg Mesotech Ltd. Canada 100 100 Kongsberg Næringsbygg 6 AS Norway 100 100 Kongsberg Protech Systems Kongsberg Næringsbygg 7 AS Norway Sold 100 Canada Corporation Canada 100 100 Kongsberg Næringsbygg 8 AS Norway Sold 100 Kongsberg Maritime Kongsberg Næringsbygg 9 AS Norway Sold 100 Simulation Inc. USA 100 100 Kongsberg Næringsbygg 10 AS Norway 100 Simrad North America Inc. USA 100 100 Kongsberg Næringsbygg 11 AS Norway 100 Kongsberg Maritime Inc. USA 100 100 Kongsberg Next AS Norway 100 Kongsberg Underwater Kongsberg Renewable Technology Inc. USA 100 100 Technology AS Norway 100 Kongsberg Protech Systems Kongsberg Seatex AS Norway 100 100 USA Corporation USA 100 100 Vehicle Tracking and Information Kongsberg Oil & Gas Systems AS Norway 100 100 Technologies Inc. USA 100 100 Nerion AS Norway 100 100 Kongsberg Defense Systems Inc. USA 100 100 Kongsberg Maritime AS Norway 100 100 Seaflex Riser Technology Inc. USA 100 100 Kongsberg Norcontrol IT AS Norway 100 100 Kongsberg Maritime GlobalSim Inc. USA 100 100 Engineering AS Norway 100 100 Hydroid Inc. USA 100 100 Portside AS Norway 100 100 Kongsberg Gallium Corperation USA 100 100 Kongsberg Evotec AS Norway 100 100 Kongsberg Integrated Tactical Systems Inc. USA 100 100 Kongsberg Asia Pacific Ltd. Norway 100 100 Kongsberg Maritime do Brasil Kongsberg Nemo AS Norway Merged 100 S.A. Brazil 80 80 Kongsberg NemoTech AS Norway 100 100 Kongsberg Maritime Traning do Kongsberg Nemo AB Sweden 100 100 Brasil S.A. Brazil 100 100 Kongsberg Maritime S.R.L Italy 100 100 Kongsberg Oil & Gas Technolo- Simrad S.R.L Italy 100 100 gies do Brazil S.A. Brazil 100 100 Kongsberg Maritime The Kongsberg Maritime Mexico Holland BV Netherlands 100 100 S.A. DE C.V. Mexico 100 100 Kongsberg Maritime Poland Kongsberg Defence Chile SpA Chile 100 100 Sp.z o.o. Poland 100 100 Kongsberg Maritime Hoi Tung Kongsberg Defence Sp.z o.o. Poland 100 100 Holding Ltd. China 90 90 Simrad Spain S.L. Spain 100 100 Kongsberg Maritime China Kongsberg Maritime Sweden AB Sweden 100 100 Shanghai Ltd. China 100 100 Kongsberg Defence Oy Finland 100 100 Kongsberg Maritime China Kongsberg Maritime GmbH Germany 100 100 Zhenjiang Ltd. China Merged 56,2 Kongsberg Maritime Kongsberg Maritime China Embient GmbH Germany 100 100 Jiangsu Ltd. China 97 100 Kongsberg Reinsurance Ltd. Ireland 100 100 Kongsberg Maritime Korea Ltd. South Korea 96,9 96,9

70 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Country Stake at Stake at Name of company of origin 31 Dec 14 31 Dec 13

Kongsberg Norcontrol IT Pte. Ltd. Singapore 100 100 Kongsberg Maritime Pte. Ltd. Singapore 100 100 GeoAcoustics Asia Pacific Pte Ltd. Singapore 100 100 Kongsberg Maritime India Pvt. Ltd. India 91 91 Kongsberg Oil & Gas Technologies PVT Ltd. India 100 100 Kongsberg Software & Services Pvt Ltd (Digimaker PVT) India 100 100 Kongsberg Norcontrol surveillance Pvt. Ltd. India 100 100 Kongsberg Defence Ltd. Co. Saudi Arabia 100 100 Kongsberg Maritime Middle East DMCCO UAE 70 70 Kongsberg Protech Systems Australia Pty Ltd. Australia 100 100 Kongsberg Oil & Gas Technologies Pty. Ltd. Australia 100 100 Kongsberg Maritime Australia Pty Ltd. Australia 100 100 Kongsberg Maritime Malaysia Sdn. Bhd. Malaysia 100 100

32 Investments in joint arrangements and associated companies

IFRS 11 Joint Arrangements has been implemented from 1 January 2014. For KONGSBERG, this entails that the company Kongsberg Satellite Services AS, of which KONGSBERG owns 50 per cent and has previously been proportionately consolidated, is now included according to the equity method. The profit/loss element after tax has been included together with corresponding items from other investments on the line “Share of net income from joint arrangements and associated companies”. “Net assets” are shown on the line “Shares in joint arrangements and associated companies”. The mentioned accounting lines for 2014 also show a group of other companies that, from 2014, will be presented according to the equity method. In the table below these are called “other companies” and were reported as other shares on the line “available-for-sale shares” in 2013. As the change is not considered to have a significant impact on assessment of the Group’s income statement and balance sheet, the comparison figures have not been changed. Operating revenue from Kongsberg Satellite Services AS was in 2013 contributed into the Group accounts with MNOK 241, and assets consolidated added up to MNOK 299.

Specification of movement in the balance sheet 1 January–31 December:

Other compre­-­ Profit/loss hensive profit/ Net assets during the loss during Net assets MNOK 1 Jan 14 Contributions period the period 31 Dec 14

Kongsberg Satellite Services AS 207 - 68 (6) 269 Other 49 1 (6) 44 Total 256 1 62 (6) 313

KONGSBERG • Annual Report and Sustainability Report 2014 71 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

33 Transactions with related parties

The Norwegian State as the largest owner Other The Norwgian State as represented by the Minstry of Trade, The CEO, Water Qvam, is a board member of Petroleum Industry and Fisheries is KONGSBERG’s largest owner (50.001 per Geo-services ASA. In 2014, KONGSBERG’s sales to the PGS cent of the shares in Kongsberg Gruppen ASA). The State Group totalled MNOK 165. Accounts receivable towards the PGS represented by the Ministry of Defence is an important customer Group amounted to MNOK 26 at 31 December 2014. for the Group. Sales to the Armed Forces are regulated by the EEA agreement and the Procurement Regulations for the Armed Forces, which guarantee equal treatment for all vendors. At 31 December 2014 KONGBERG had an outstanding balance from State-owned customers of MNOK 79, while other liability items in respect of state suppliers amounted to MNOK 8. In 2014, KONGSBERG issued invoices to state customers for a total of MNOK 1,782. Goods and services purchased from state suppliers in 2014 amounted to MNOK 22. Please refer also to the Board’s report on corporate governance Chapter 4 “Equal treatment of shareholders and related party transactions”, where the State as a customer and shareholder is described in more detail.

34 Contingent liabilities

Charge in corruption case Romania Lawsuit from Rolls-Royce Marine AS against In February 2014, charges were taken out against Kongsberg Kongsberg Evotec AS Gruppen ASA, Kongsberg Defence & Aerospace AS and an em- In 2014, KONGSBERG was sued by Rolls-Royce Marine AS. ployee of Kongsberg Defence & Aerospace AS with allegations of The main hearing in the case between Kongsberg Evotec and serious corruption related to deliveries of communication equipment Rolls-Royce Marine took place in the Ålesund District Court from to Romania from 2003 to 2008. KONGSBERG is cooperating with 9 February to 3 March. the Norwegian National Authority for Investigation and Prosecution Rolls-Royce has submitted a statement of claim to the effect of Economic and Environmental Crime (Økokrim) to clarify the that Kongsberg Evotec AS shall be prohibited from selling, actual circumstances, but it must be expected that it will take some producing and marketing complete equipment packages for aft time yet before the investigation is complete and the case can be deck operations on seismic vessels, as well as a number of individual concluded. products, for a period according to the Court’s discretion. They KONGSBERG has zero-tolerance for corruption, and high ethical have also submitted a claim for compensation according to the standards are an integrated part of our business. KONGSBERG has Court’s discretion, indicated in the order of MNOK 279 to 395. over several years established and further developed compliance KONGSBERG has submitted a statement of claim for full acquittal. guidelines and functions at group level and in the business areas. The case has been submitted for judgement and we are awaiting The current anti-corruption system is considered to be at a good the District Court’s decision. international level, and has also been assessed by external parties to constitute a solid and robust system. Reference is also made to the section: “Risk factors and risk management” in the Board of Directors’ Report. At this point in time, it is not possible to estimate the result of Økokrim’s investigation or other effects of the charge and the circumstances on which is has been based. Accordingly, it is not possible to estimate any possible financial effects for KONGSBERG.

72 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

INCOME STATEMENT AND BALANCE SHEET Kongsberg Gruppen ASA

INCOME STATEMENT 1 JANUARY–31 DECEMBER BALANCE SHEET AT 31 DECEMBER

MNOK Note 2014 2013 MNOK Note 2014 2013

Revenues 9 203 204 Assets Profit on sale of property 12 58 - Non-current assets Total revenues 261 204 Deferred tax asset 6 119 70 Payroll expenses 4,5 (137) (125) Fixed assets 6 9 Depreciation (3) (3) Shares in subsidiaries 3 2 215 2 215 Other operating expenses 4 (238) (151) Other shares 99 53 Total operating expenses (378) (279) Long-term receivables from subsidiaries 9 2 587 2 233 Operating profit (117) (75) Other long-term receivables 49 48 Total non-current assets 5 075 4 628 Interest from group companies 79 76 Impairment of shares (1) - Current assets Gain on currency exchange 7 5 Receivables from subsidiaries 9 1 469 867 Interest to group companies (89) (50) Other short-term receivables 44 34 Other interest expenses (86) (28) Cash and cash equivalents 11 2 272 1 543 Other finance income 101 31 Total current assets 3 785 2 444 Other finance expenses (6) (4) Total assets 8 860 7 072 Received group contribution 1 400 800 Net finance items 1 405 830 Equity and liabilities Ordinary profit before tax (EBIT) 1 288 755 Equity Income tax expense 6 42 9 Share capital 150 150 Profit for the year 1 330 764 Total paid-in capital 150 150 Other equity 1 215 1 005 Allocations and equity transfers Total retained earnings 1 215 1 005 Proposed dividend (1 110) (630) Total equity 2 1 365 1 155

Non-current liabilities Pension liabilities 5 246 210 Debt to credit institutions 7 750 750 Other non-current liabilities 12 111 39 Total non-current liabilities 1 107 999

Current liabilities Dividend 1 110 630 Debt to credit institutions - 500 Current liabilities to subsidiaries 9 5 136 3 677 Other current liabilities 142 111 Total current liabilities 6 388 4 918 Total equity and liabilities 8 860 7 072

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STATEMENT OF CASH FLOWS Kongsberg Gruppen ASA

MNOK Note 2014 2013

Profit before tax 1 288 755 Profit from sale of shares (58) - Depreciation 3 3 Impairment of financial assets 2 - Taxes paid - (104) Changes in accruals, etc. 111 49 Net cash flows from operating activities 1 346 703

Cash flow from investing activities Purchase of fixed assets - (3) Purchase of shares (47) - Net payments from sale of shares 12 264 - Net cash flows used in investing activities 217 (3)

Cash flow from financing activities Payment of loans (500) - Paid dividend (628) (450) Net receipts/disbursements for purchase/disposal of treasury shares (7) (17) Changes in intercompany balances 301 606 Changes in group bank overdraft facilities - (437) Net cash flows used in financing activities (834) (298)

Net increase (decrease) in cash and cash equivalents 729 402 Cash and cash equivalents at the beginning of the period 1 543 1 141 Cash and cash equivalents at the end of the period 2 272 1 543

NOTES Kongsberg Gruppen ASA

1 Accounting policies

The financial statements for Kongsberg Gruppen ASA have been Classification and valuation of balance sheet items prepared in accordance with the Norwegian Accounting Act and Current assets and current liabilities include items due for payment generally accepted accounting practices in Norway. within one year after the date of acquisition, as well as items associated with the goods circulation. Other items are classified as Subsidiaries and associated companies fixed assets/non-current liabilities. Current assets are measured at Subsidiaries and associates are measured at cost in the statutory the lower of cost and fair value. Current liabilities are recorded at accounts. The investments are measured at acquisition cost for the their nominal values on the date of acquisition. Fixed assets are shares, unless impairment has been necessary. Such assets are measured at acquisition cost less depreciation, but are written down written down to fair value when a decrease in value cannot be when a decrease in value is not expected to be of temporary nature. considered to be temporary and is required pursuant to generally Non-current liabilities are measured at nominal value at the date accepted accounting principles. Impairments are reversed when the they are incurred. basis for the impairment no longer applies.

74 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Recognition of income Pensions Revenues are recognised in the period when the services are The defined contribution plan rendered. The Group introduced a defined contribution pension plan for all employees under the age of 52 as of 1 January 2008. Employees Hedging aged 52 or more at the time of the transition remained with the Kongsberg Gruppen ASA enters into hedging contracts on behalf defined benefit plan. The deposit is expensed as incurred. of subsidiaries and enters into “back to back-” agreements with external banks. See also Note 10 “Currency hedging,” and Note 3J The defined benefit plan “Financial instruments” to the consolidated financial statement. Pension expenses and pension liabilities are calculated using linear accruals based on estimated salary levels at retirement and on a Receivables number of assumptions including discount rates, future salary Accounts receivables and other receivables are recognised in the adjustments, pensions and benefits from the National Insurance balance sheet at nominal values less provisions for expected loss. Scheme, and future interest income on pension fund assets, as well Provisions for losses are made on the basis of individual assess- as actuarial assumptions on mortality and voluntary retirement. ments of each receivable. Pension fund assets are measured at their fair value, less net pension liabilities at date of the balance sheet. Foreign currency Monetary items in a foreign currency are assessed using the Income tax exchange rate applicable at year-end. Gains and losses related to The tax expense comprises tax payable and changes in deferred items in a foriegn currency and that are part of the goods tax in the period. Deferred tax/tax assets are calculated at 27 per circulation, are included in the operating profit/loss. Other gains and cent on all temporary differences between the book value and tax losses related to items in foreign currency are classified as financial value of assets and liabilities, and loss carried forward at the end of income or costs. the reporting period. Taxable and deductible temporary differences that reverse or may reverse in the same period are offset. Deferred Short-term investments tax assets are recognised when it is probable that the company will Short-term investments (shares and other items considered to be have adequate profit for tax purposes in subsequent periods to current assets) are measured at the lower of acquisition cost and utilise the tax asset. fair value at the date of the balance sheet. Dividend and other distributions from the companies are recognised as other finance Cash flow statement income. The cash flow statement was prepared using the indirect method. Cash and short-term deposits comprise cash reserves, bank deposits and other short-term liquid investments.

2 Equity reconciliation

Share Retained Total MNOK capital earnings equity

Equity at 31 December 2012 150 883 1 033 Profit for the year - 764 764 Trading in treasury shares - (3) (3) Dividend for 2013 - (630) (630) Actuarial gain/loss on pension expense - (9) (9) Equity at 31 December 2013 150 1 005 1 155 Profit for the year - 1 330 1 330 Trading in treasury shares - 10 10 Dividend for 2014 - (1 110) (1 110) Actuarial gain/loss on pension expense - (20) (20) Equity at 31 December 2014 150 1 215 1 365

Other information about the company’s share capital is provided in Note 23 “Share capital “ to the consolidated financial statements. The total number of treasury shares at 31 December 2014 is 26,674.

KONGSBERG • Annual Report and Sustainability Report 2014 75 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

3 Shares in subsidiaries

Date of Registered Stake Carrying amount MNOK acquisition office percentage 31 Dec

Kongsberg Defence & Aerospace AS 1997 Kongsberg 100 506 Kongsberg Teknologipark AS 1987 Kongsberg 100 5 Kongsberg Holding AS 1987 Kongsberg 100 - Kongsberg Basetec AS 1992 Kongsberg 100 106 Kongsberg Maritime AS1) 1992 Kongsberg 89 1 101 Kongsberg Forsvar AS 1995 Kongsberg 100 - Norsk Forsvarsteknologi AS 1987 Kongsberg 100 - Kongsberg Næringseiendom AS 1997 Kongsberg 100 198 Kongsberg Næringsparkutvikling AS 2005 Kongsberg 100 48 Kongsberg Næringsbygg 2 AS 2006 Kongsberg 100 25 Kongsberg Næringsbygg 3 AS 2006 Kongsberg 100 24 Kongsberg Næringsbygg 5 AS 2007 Kongsberg 100 68 Kongsberg Næringsbygg 6 AS 2007 Kongsberg 100 130 Kongsberg Næringsbygg 10 AS 2014 Kongsberg 100 - Kongsberg Næringsbygg 11 AS 2014 Kongsberg 100 - Kongsberg Next AS 2014 Kongsberg 100 - Nerion AS 2002 Trondheim 100 - Kongsberg Hungaria Kft2) 2003 Budapest 10 - Kongsberg Reinsurance Ltd. 2001 Dublin 100 4 Total 2 215

1) The remaining shares in Kongsberg Maritime AS are owned by Kongsberg Basetec AS with 11 per cent. 2) The remaining shares in Kongsberg Hungaria Kft are owned by Kongsberg Defence & Aerospace AS with 90 per cent

4 Payroll expenses and auditor’s fee

For salary and remuneration for executive management and board members, reference is made to Note 29 “Compensation for corporate management and the Board of Directors” in the consolidated financial statements

Auditors’ fees Payroll expenses

TNOK 2014 2013 MNOK 2014 2013

Corporate auditor Ernst & Young: Salaries 80 77 Statutory audit 860 883 Social security tax 13 14 Other assurance services 84 166 Pension 20 19 Tax consultancy 1 777 1 112 Other benefits 24 15 Other services outside the audit 3 799 758 Total payroll expenses 137 125 Total fees, Ernst & Young 6 520 2 919 Total man-labour years 57 56

76 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

5 Pension

KONGSBERG has a service pension plan that consists of a defined Early retirement contribution plan and a defined benefit plan and complies with laws In 2009, the Group introduced new rules for early retirement for and regulations. The service pension plans include all employees in newly hired members of executive management and others in Norway. certain key positions. The rules entail early retirement from the age of 65 at the latest, but with reciprocal rights for the company and The defined contribution plan the employee in corporate management to request retirement from The Group introduced a defined contribution pension plan for all the age of 63. Benefits are equal to 65 per cent of the annual wage, employees under the age of 52 as of 1 January 2008. The contribu- based on a minimum of 15 contribution years. If the employee tion rates are 0 per cent of the basic wage up to 1G, 5 per cent of resigns between 63 and 65, this will reduce pension earnings for the basic wage between 1G and 6G, and 8 per cent of the basic other plans. It has been decided not to continue the scheme with wage from 6G up to 12G. The employees can influence the way the early retirement agreements for executives (and employees in funds are managed by choosing to invest either 30, 50 or 80 per certain key positions who previously were offered agreements on cent, respectively, of their portfolios in shares. The Group also has a early retirement) employed after 1 July 2013. These individuals will collective, unfunded contribution plan for salaries between 12G and receive an additional contribution of 12 per cent of the basic salary 15G. The entity’s deposits in this plan constitute 18 per cent of the in excess of 12G to the unfunded pension scheme, as long as they share of the basic wage in excess of 12G, up to a ceiling of 15G. are employed, but only until the age of 65 at the latest. Special terms and conditions apply for executives. This is described Pension expenses for the year are calculated on the basis of the in Note 28 “Statement on the Group CEO Executive Management financial and actuarial assupmtions that apply at the beginning of remuneration” to the consolidated financial statements. The em- the year. Gross pension liabilities are based on the financial and ployees have the same investment choices in the supplementary actuarial assuptions made at year end. plan as in the main plan. The contributions are expensed as they are incurred. The calculation of future pensions in the benefits plan is based on the following assumptions: The defined benefit plan 31 Dec 14 31 Dec 13 In connection with the transition to the defined contribution plan on 1 January 2008, employees aged 52 or more remained in Discount rate 2.30% 3.75% the defin­ed benefit plan. The pension plan is insured through DNB Asset return 2.30% 3.75% Life Insurance. The pension benefits are defined by the number of Wage adjustment 2.00% 3.00% contribution years and the salary level of the individual employee. Pension base level (G) adjustment 2.50% 3.50% Pension costs are distributed over the employee’s accrual period. Pension adjustment 1.75% 2.25% Based on the current National Insurance system before 1 January Mortality K 2013 K 2013 2011 and full accrual, the plan gives entitlement to about 65 per Disability IR 73 IR 73 cent of the salary at retirement, including benefits from the National Voluntary turnover 4.50% 4.50% Insurance plan until the age of 77, then the service pension compo- nent will be reduced by 50 per cent for the remaining life time. The Group also has a collective, unfunded contribution plan for The year’s pension costs were calculated as follows: salaries between 12G and 15G. The collective, unfunded benefits plan corresponds to about 60 per cent of the share of the basic MNOK 2014 2013 wage that exceeds 12G until the age of 77, and then the benefit is reduced by 50 per cent for the remaining lifetime. Special terms and Present value of earned pensions 7 7 conditions apply for executives. This is described in Note 28 Interest cost on accrued pension liabilities 4 4 “Statement on the Group CEO and Executive Management Estimated return on pension plan assets (1) (1) remuneration” to the consolidated financial statements. These Accrued social security expenses 1 1 supplementary plans were discontinued in connection with the Total net pension cost for the year 11 11 transition to defined contribution pension plans.

Cost of defined contribution Risk coverage pension plans 9 8 Disability pension from the company shall give an addition to the expected disability pension from the National Insurance Plan so that total payment constitutes approximately 65 per cent of pensionable MNOK 2014 2013 income at full accrual. An additional 10 per cent disability pension is paid for each child under the age of 21, up to maximum 6 children. Total gross pension liabilities (253) (217) The payment depends on the extent of disability and the possibility Gross value of gross pension assets 37 33 for full coverage. Starting on 1 January 2013, the risk pensions are Net pension liabilities (216) (184) unfunded for the share of the basic wage that exceeds 12G. In practice this implies that KONGSBERG is self insurer for the risk Social security expenses (30) (26) pension for future periods. Net pension liabilities in balance sheet 31 Dec. (246) (210)

KONGSBERG • Annual Report and Sustainability Report 2014 77 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

6 Income tax

Income tax expense Deferred tax and deferred tax asset

MNOK 2014 2013 MNOK 2014 2013

Taxes payable - - Pensions 66 57 Change in deferred tax (42) (9) Unused tax losses 65 11 Tax income / expense (42) (9) Other (12) 2 Recognised deferred tax asset 119 70 Tax rate in Norway 27% 27% MNOK 2014 2013

Profit before tax 1 288 755 Change in deferred tax recognised directly in equity as follows: Tax calculated at statutory rate 27 per cent of profit before tax 348 211 MNOK 31 Dec 14 31 Dec 13 Effect of reduced tax rate by 1 per cent - 3 Group contribution without tax effect (378) (224) Pensions (7) (4) Impairment of share investments - - Total (7) (4) Other permanent differences (12) 1 Tax income/expense (42) (9)

7 Long-term interest-bearing loans and credit facilities

At 31 December 2014, the Group had the following loans and credit facilities:

Nominal Years to Nominal Carrying Due date interest rate maturity amount amount

Bond issue KOG 07 10.9.19 4.80% 4.7 250 250 Bond issue KOG 06 10.9.17 3.28% 2.7 500 500 Total loans 750 750 Credit facility (undrawn borrowing limit) 7.4.19 1 500 -

At 31 December 2014, Kongsberg Gruppen ASA established a new Kongsberg Gruppen ASA had three bond loans at the beginning of syndicated loan facility facility with four Nordic banks and one 2014, of which one loan of MNOK 500 was due in April 2014. The international bank: Danske Bank, DNB, JP Morgan Chase, Nordea bond loans were issued in NOK and listed on the Oslo Stock and SEB. The facility is for general business purposes. The new Exchange. The interest is 3-month NIBOR + 1.8 per cent for loans facility has a maturity of five years with an option to extend one with a nominal value of MNOK 500 and maturity in 2017, and fixed year, twice. The interest rate is NIBOR + a margin that depends on interest rate of 4.80 per cent for the bond loan with a nominal value the ratio between net interest-bearing loans/EBITDA and can vary of MNOK 250 and maturity in 2019. The loans are capitalised at from 0.5 per cent to 1 per cent. The credit facilities require that net their amortised cost using the effective interest method. interest-­bearing debt shall not exceed three times the EBITDA, but All loans in the Group are centralised to Kongsberg Gruppen ASA can be up to 3.5 times the figure for three consecutive quarters at and handled by the Group’s treasury unit. the most. The covenants in the loan agreements have been met. The loan facility was undrawn in 2014.

78 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

8 Guarantees

Kongsberg Gruppen ASA has in the period from 1999 to 2014 sold Prepayment and completion guarantees properties in the Kongsberg Technology Park. The properties have Group companies have provided guarantees for prepayments and been leased back on long-term leases, of which one expired in 2014 completion in connection with projects. The guarantees are issued and the rest expire from 2017 to 2031. The leasebacks are classified by Norwegian and foreign banks and insurance companies. as operating leasing agreements. Kongsberg Gruppen ASA is responsible for all guarantees. In addition to lease payments, Kongsberg Gruppen ASA is responsible for certain expenses related to taxes and maintenance of the properties. With the exception of the properties sold in 2007 and 2014, the properties are mainly leased to external tenants.The leases have durations ranging from three months to 15 years. Further information on provisions related to these leases are given in Note 24 “Provisions” to the consolidated financial statements. The parent company has guaranteed lease amount related to sale and lease-back agreements at a total of MNOK 1,368.

MNOK 2014 2013

Guarantees issued by banks and insurance companies 3 109 2 261 Guarantees issued by Kongsberg Gruppen ASA 5 560 1 671 Prepayments from and completion guarantees to customers 8 669 3 932

Kongsberg Gruppen ASA has non-committed framework agreements for guarantees with banks and insurance companies.

9 Related parties

Operating income

MNOK 2014 2013

Kongsberg Maritime AS 97 90 Kongsberg Oil & Gas Technologies AS 15 6 Kongsberg Defence & Aerospace AS 78 85 Others 13 23 Total operating income related parties 203 204

Operating income from related parties is mainly billing of group management fees and insurance.

KONGSBERG • Annual Report and Sustainability Report 2014 79 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Long-term receivables from related parties Short-term liabilities to related parties

MNOK 2014 2013 MNOK 2014 2013

Kongsberg Næringseiendom AS 100 100 Kongsberg Maritime AS 832 311 Kongsberg Teknologipark AS - - Norcontrol IT - - Kongsberg Næringsbygg 2 AS 79 79 Kongsberg Seatex AS 249 54 Kongsberg Næringsbygg 3 AS 103 103 Kongsberg Defence & Aerospace AS 3 935 3 215 Kongsberg Norcontrol IT AS 109 9 Kongsberg Spacetec AS 27 11 Kongsberg Næringsbygg 5 AS 48 58 Kongsberg Maritime Inc 11 9 Kongsberg Næringsbygg 6 AS 12 22 Portside 7 Kongsberg Maritime Engineering AS 35 20 Global Sim Inc 26 18 Kongsberg Oil & Gas Technologies AS 777 739 Kongsberg Underwater Technology Inc 15 12 Kongsberg Næringsbygg 7 AS - 93 Kongsberg Reinsurance Ltd 33 30 Kongsberg Evotec AS 116 152 Kongsberg Norspace AS - 14 Kongsberg Gallium Ltd 34 46 Other companies 1 3 Kongsberg Protech Systems USA Total 5 136 3 677 Corporation Inc. 57 64 Hydroid Inc 568 392 Kongsberg Maritime Holding Ltd 50 43 Kongsberg Oil & Gas Techonologies Inc 1 9 Short-term receivables from related parties Kongsberg Protech Systems Canada Corperation Inc 122 20 MNOK 2014 2013 Kongsberg Maritime Hoi Tung Holding Ltd 85 50 KM Training do Brasil LTDA 14 12 Kongsberg Maritime AS 705 360 Kongsberg Maritime Middle East DMCCO 7 Kongsberg Oil & Gas Technologies AS 8 3 Kongsberg Integrated Tactical systems Inc (KITS) 150 64 Kongsberg Defence & Aerospace AS 706 459 Konsberg Maritime Hellas AS 3 4 Kongsberg Maritime Holding Ltd 5 0 1) Kongsberg Nemo AS - 70 Kongsberg Basetec AS 40 40 Kongsberg Nemotech AS 22 23 Other 5 5 KM Mexico S.A.de CV 6 5 Total 1 469 867 Kongsberg Maritime do Brasil SA 14 14 KM Malaysia 15 12 Kongsberg Oil & Gas Technologies Ltd 11 9 Kongsberg Oil & Gas Technologies Pty Ltd 13 5 Kongsberg Norspace AS 9 - Kongsberg Maritime Embient GmbH 25 - Kongsberg Maritime Australia Pty Ltd 3 - Other companies 6 9 Total 2 587 2 233

1) The company merged with Kongsberg Oil & Gas Technologies AS from 1 Jan. 2014

80 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

10 Currency hedging

At 31 December, the company had the following foreign currency hedges, divided by hedge category:

Gross value Total Average Total Average in NOK at Net excess(+)/ hedged hedged ex- hedged hedged ex- 2014 31 Dec 14 less value(-) amount change rate amount change rate based on in NOK at in USD in USD at in EUR at in EUR at Amounts in mill. hedged rates 31 Dec 14 2014 31 Dec 14 31 Dec 14 31 Dec 14

Hedge category Forward contracts, cash flow hedges 9 240 (1 031) 1 125 6.61 142 8.56 Total cash flow hedges 9 240 (1 031) 1 125 142

Fair value hedges 10 532 (1 492) 1 399 6.37 192 8.71 Loan hedges (fair value hedges) 1 133 (3) 122 7.40 3 9.10 Currency hedges 20 905 (2 526) 2 646 337

Gross value Total Average Total Average in NOK at Net excess(+)/ hedged hedged ex- hedged hedged ex- 2013 31 Dec 13 less value(-) amount change rate amount change rate based on in NOK at in USD in USD at in EUR at in EUR at Amounts in mill. hedged rates 31 Dec 13 2013 31 Dec 13 31 Dec 13 31 Dec 13

Hedge category Forward contracts, cash flow hedges 10 373 (37) 1 476 6.12 165 8.15 Total cash flow hedges 10 373 (37) 1 476 165

Fair value hedges 8 521 (105) 944 6.06 275 8.28 Loan hedges (fair value hedges) 728 5 106 1 Currency hedges 19 622 (137) 2 526 441

KONGSBERG • Annual Report and Sustainability Report 2014 81 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Currency hedges related parties Gross value Total Average Total Average in NOK at Net excess(+)/ hedged hedged ex- hedged hedged ex- 2014 31 Dec 14 less value(-) amount change rate amount change rate based on in NOK at in USD in USD at in EUR at in EUR at Amounts in mill. hedged rates 31 Dec 14 31 Dec 14 31 Dec 14 31 Dec 14 31 Dec 14

Hedge category Kongsberg Maritime, Forward contracts, cash flow hedges 5 424 (758) 712 6.45 97 8.50 Kongsberg Maritime Engineering, Forward contracts, cash flow hedges ------Kongsberg Oil & Gas Technologies, Forward contracts, cash flow hedges 184 (27) 29 6.46 - - Kongsberg Defence System, Forward contracts, cash flow hedges 1 669 (51) 192 6.45 32 8.71 Kongsberg Protech System, Forward contracts, cash flow hedges 1 690 (155) 156 6.65 8 8.58 Kongsberg Norcontrol IT AS 273 (40) 36 6.40 5 8.40 Total cash flow hedges 9 240 (1 031) 1 125 142

Kongsberg Maritime, Project hedges 3 833 (533) 489 6.42 72 8.54 Kongsberg Maritime Engineering, Project hedges 81 (12) 14 6.56 (2) 8.65 Kongsberg Oil & Gas Technologies, Project hedges 86 (10) 12 6.62 1 8.45 Kongsberg Defence System, Project hedges 3 514 (673) 529 6.12 15 9.15 Kongsberg Protech System, Project hedges 1 436 (120) 160 6.84 (2) 7.94 Kongsberg Satelite Service, Project hedges 953 (102) 84 6.36 46 8.91 Kongsberg Spacetec 51 (3) 2 6.88 4 8.54 Kongsberg Norcontrol IT AS 362 (25) 7 6.82 36 8.49 Other companies 216 (14) 102 - 22 8.75 Currency hedges 19 772 (2 523) 2 524 334

Gross value Total Average Total Average in NOK at Net excess(+)/ hedged hedged ex- hedged hedged ex- 2013 31 Dec 13 less value(-) amount change rate amount change rate based on in NOK at in USD in USD at in EUR at in EUR at Amounts in mill. hedged rates 31 Dec 13 31 Dec 13 31 Dec 13 31 Dec 13 31 Dec 13

Hedge category Kongsberg Maritime, Forward contracts, cash flow hedges 3 809 (67) 507 6.08 90 8.01 Kongsberg Maritime Engineering, Forward contracts, cash flow hedges ------Kongsberg Oil & Gas Technologies, Forward contracts, cash flow hedges 192 (4) 32 6.02 - - Kongsberg Defence System, Forward contracts, cash flow hedges 5 745 35 875 6.13 46 8.28 Kongsberg Protech System, Forward contracts, cash flow hedges 628 (3) 62 6.16 29 8.35 Kongsberg Norcontrol IT AS Total cash flow hedges 10 374 (39) 1 476 165

Kongsberg Maritime, Project hedges 4 008 (67) 578 6.03 51 8.21 Kongsberg Maritime Engineering, Project hedges 10 - - - - 8.25 Kongsberg Oil & Gas Technologies, Project hedges 103 - 20 6.04 - 8.19 Kongsberg Defence System, Project hedges 2 605 (33) 131 5.97 209 8.34 Kongsberg Protech System, Project hedges 1 452 15 148 6.21 24 8.24 Kongsberg Satelite Service, Project hedges 526 (13) 51 6.04 26 8.21 Kongsberg Spacetec 57 (1) 3 6.00 5 8.19 Kongsberg Norcontrol IT AS 113 (7) 1 6.11 12 8.09 Other companies 19 248 (145) 2 408 492

82 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

11 Cash and cash equivalents 12 Sale of property

Nominal amounts in MNOK 31 Dec 14 31 Dec 13 On 17 December 2014, Kongsberg Gruppen ASA sold three properties, of which two are currently under contruction. Leaseback Short-term money market investments 2 116 860 agreements for the buildings were entered into between the buyer Bank deposits, operating accounts 156 683 and a subsidiary of Kongsberg Gruppen ASA. Total 2 272 1 543 The properties were sold at a property value of MNOK 463. The properties were sold as part of the public limited companies Kongsberg Næringsbygg 7 AS, Kongsberg Næringsbygg 8 AS and Bank guarantees amounting to MNOK 10 (MNOK 10 in 2013) have Kongsberg Næringsbygg 9 AS. The total purchase sum for the been furnished for funds related to withholding tax for employees. shares was MNOK 137, and resulted in profits of MNOK 58. The The Group’s liquidity management is handled by the Group’s transaction was not subject to tax in accordance with the corporate treasury unit. exemption model. The transaction entailed a net cash settlement of MNOK 264, of which MNOK 131 is settlement for the shares less transaction costs and MNOK 133 is debt settlement. Kongsberg Gruppen ASA guarantees costs for construction and time of completion for the buildings, as well as for maintenance of the buildings during the leaseback period. The liability recognised in the balance sheet related to these guarantees totals MNOK 57, of which MNOK 48 is classified under other long-term debt.

STATEMENT FROM THE BOARD OF DIRECTORS Kongsberg Gruppen ASA

We hereby confirm, to the best of our conviction, that the annual accounts for 1 January to 31 December 2014 have been drawn up in compliance with recognised accounting standards, and that the information disclosed therein gives a true picture of the enterprise’s and the Group’s assets, liabilities, financial position and performance as a whole, and that the information disclosed in the director’s report gives a true picture of the progress, profits and position of the enterprise and the Group, as well as a description of the most central risk and uncertainty factors facing them.

Kongsberg, 20 March 2015

Finn Jebsen, Chairman Anne-Lise Aukner, Deputy chairman Irene Waage Basili, Director Roar Flåthen, Director Morten Henriksen, Director

Magnar Hovde, Director Helge Lintvedt, Director Roar Marthiniussen, Director Walter Qvam, President and CEO

KONGSBERG • Annual Report and Sustainability Report 2014 83 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

AUDITOR’S REPORT 2014

84 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

KONGSBERG • Annual Report and Sustainability Report 2014 85 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information GOVERNANCE CORPORATE

“The Group’s value platform and ethical guidelines are a fundamental premise for KONGSBERG’s corporate governance.”

86 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

THE BOARD’S REPORT ON CORPORATE GOVERNANCE

KONGSBERG’s objective is to safeguard and enhance stakeholder value through profitable and growth-oriented industrial development in a long-term and international perspective.

Good corporate governance and corporate management the governing bodies in a company, and the responsibility shall maximise value creation and reduce business-related and authority assigned to each body. Good corporate risk, while the company’s resources shall be utilised in an governance is distinguished by responsible interaction effective and sustainable manner. The Group shall achieve between owners, the Board and management, seen in a its goals through further development of first- class com­ long-term productive and sustainable perspective. It calls petency centres, deliveries of leading systems, products and for effective cooperation, a defined division of responsibili- services in its international market segments, as well as by ties and roles between the shareholders, the Board and operating in an ethical, sustainable and socially responsible management, respect for the Group’s other stakeholders manner. KONGSBERG is listed on the Oslo Stock Exchange and open, reliable communication with the world around us. and is subject to Norwegian securities legislation and stock exchange regulations. Treatment of the topic in 2014 The topic of corporate governance is subject to annual How KONGSBERG understands the concept evaluations and discussions by the corporate Board of The Group’s value platform and ethical guidelines are a Directors. Among other things, the Group’s governance fundamental premise for KONGSBERG’s corporate documents are reviewed and revised annually, and the text governance. Corporate governance deals with issues and for this chapter of the annual report is reviewed in detail by principles associated with the distribution of roles between the Board.

KONGSBERG’s MODEL FOR CORPORATE GOVERNANCE

Owners Board of Directors Management

“The Group’s value platform and ethical guidelines Shareowner Board of directors Chief Executive Officer are a fundamental premise for Annual general meeting Compensation Committee Corporate Management

KONGSBERG’s corporate governance.” Nominating committee Audit Committee

The Annual General Meeting elects five Ultimate responsibility for strategy and Strategy and operational management. representatives of the owners to the Board the management of the company. of Directors based on a recommendation Provide advice and monitor management. from the Nominating Committee. They are elected for a two-year term of office.

KONGSBERG • Annual Report and Sustainability Report 2014 87 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Policy Kongsberg Gruppen

KONGSBERG is subject to the reporting requirements The following elements are fundamental to regarding corporate governance pursuant to Section KONGSBERG’s corporate governance policy: 3-3b of the Norwegian Accounting Act, as well as the • KONGSBERG shall maintain open, reliable and relevant “Norwegian Code of Practice for Corporate Governance”, communication with the public about its business cf. Item 7, ongoing requirements for listed companies. activities and factors related to corporate governance. The Norwegian Accounting Act is available on • KONGSBERG’s Board of Directors shall be autono- www.lovdata.no. The “Norwegian Code of Practice mous and independent of the Group’s management. for Corporate Governance”, most recently revised on • KONGSBERG will attach importance to avoiding 30 October 2014, is available on www.nues.no. conflicts of interest between the owners, the Board In compliance with Section 5-4 of the Public Limited and administration. Liability Companies Act, this report will be dealt with at • KONGSBERG will have a clear division of responsibili- KONGSBERG’s Annual General Meeting on 7 May 2015. ties between the Board and management. The Group’s compliance with and any deviations from • All shareholders are to be treated equally. the recommendation will be commented on and made available to the Group’s stakeholder. The Group’s Corporate Social Responsibility work is The policy was adopted by the corporate Board of considered an integral part of the principles for good Directors. The Norwegian state, which owns 50.001 per corporate governance. This is in keeping with the cent of the Group, also assumes that all companies in State’s vision, as expressed in the “Ownership Report”. which the State has a stake will comply with the recommendation. Since the Norwegian state owns a stake of 50.001 per cent, the Group also complies with White Paper No. 13 (2006–2007) – the “Ownership Report”, White Paper No. 27 (2013-2014) – “A diverse and value creating ownership”,, the Norwegian state’s 10 Principles for Good Corporate Governance and the OECD’s Guidelines regarding State Ownership and Corporate Governance. These guidelines are posted on the Group’s website at www.kongsberg.com

88 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Articles of association Kongsberg Gruppen

§ 1 The name of the Company is Kongsberg Gruppen 3. Elect the shareholders’ representatives and their ASA. The Company is a public company. deputies to the corporate Board of Directors. § 2 The Company’s registered office is in Kongsberg 4. Elect the members of the Nominating (Norway). Committee. § 3 The object of Kongsberg Gruppen ASA is to engage 5. Elect one or more auditors, based on nominations in technological and industrial activities in the mari- made by the General Meeting. time, defence and related areas. The Company may 6. Stipulate the Board’s compensation and approve participate in and own other companies. compensation to the Auditor. § 4 The Company’s share capital is NOK 150,000,000, 7. Deal with the Board’s declaration regarding the divided among 120,000,000 shares with a nominal stipulation of salary and other compensation to value of NOK 1.25. The Company’s shares shall be key management personnel. registered in the Norwegian Registry of Securities. The convening letter shall state that sharehold- § 5 The Board shall have from five to eight members ers who would like to participate in the General (Directors). Up to five Directors and up to two Meeting are to sign up by a deadline specified in the Deputy Directors shall be elected by the Annual convening letter. The deadline shall expire no more General Meeting. According to regulations laid down than five days prior to the General Meeting. The pursuant to the provisions of the Norwegian Com- General Meetings are led by the Chairman of the panies Act regarding employee representation on the Board, or if he is absent, by the Deputy Chairman. If Board of Directors in public limited companies, three they both are absent, the General Meeting elects a Directors and their Deputies shall be elected directly chair­person. by and from among the employees. § 9 The Nominating Committee shall consist of three § 6 The Chair of the Board has the power to sign for the members who shall be shareholders or representa- Company alone, or the Deputy Chair and another tives of shareholders. The members of the Nominat- Director may sign jointly for the Company. ing Committee, including the chair, shall be elected § 7 General Meetings will be held in Kongsberg or in by the Annual General Meeting. Oslo, and shall be convened in writing with at least The Nominating Committee shall submit its roster 21 days’ notice. Documents that apply to items on of candidates to the General Meeting to elect the the agenda for the general meeting need not be members of the Nominating Committee. The term sent to the shareholders if the documents are made of office is two years. Based on a recommendation available to the shareholders on the Company’s from the Board of Directors, the General Meeting website. This also applies to documents which are shall stipulate the compensation to be paid to the required by law to be included in or attached to the Nominating Committee’s members. The Nominat- notification of the General Meeting. A shareholder ing Committee shall present to the Annual General can nevertheless ask to be sent documents that Meeting its recommendations for the election of and apply to items on the agenda at the general meeting. remuneration to the Directors and Deputy Directors § 8 The Annual General Meeting shall: on the Board. The Chair of the Board shall, without 1. Adopt the Financial Statements and the Direc- being enfranchised to vote, be called in to at least tors’ Report, including the payment of dividends. one meeting of the Nominating Committee before 2. Discuss other matters which, pursuant to the Nominating Committee presents its final recom- legislation or the Articles of Association, are the mendation. province of the General Meeting.

KONGSBERG • Annual Report and Sustainability Report 2014 89 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

THE BOARD’S REPORT ON THE NORWEGIAN CODE OF PRACTICE FOR CORPORATE GOVERNANCE

The Kongsberg Group Board of Directors actively supports the principles for good corporate governance and attaches importance to KONGSBERG’s compliance with the Norwegian Code of Practice for Corporate Governance and to explaining any deviations. For the complete over- view of the Code with comments, see the Oslo Stock Exchange’s website at www.oslobors.no/ ob/cg or NUES (the Norwegian Corporate Governance Committee): www.nues.no

The following is a detailed discussion of each individual 8. “articles of association and authorisations that allow the section of the Norwegian Code of Practice. The review is Board to decide that the enterprise is to repurchase or based on the latest version of the Code, dated 30 October issue the enterprise’s own shares or equity certificates”: 2014. The section of the report entitled Item 3 ‘Share capital The information that KONGSBERG is required to disclose and dividends’ pursuant to Section 3-3b of the Accounting Act regarding reporting on corporate governance has been taken into ac- Deviations from the Code of Practice count in this report and follows the systematics of the Code According to the Group’s own evaluation, we deviate from of Practice where it is natural to do so. A detailed descrip- the code of practice on one major point: tion of the location of the disclosures required by Section 3-3b of the Accounting Act follows below: Item 6 – The General Meeting 1. “a statement of the recommendations and regulations There are two deviations on this point. The entire Board of concerning corporate governance that the enterprise is Directors has not usually attended the General Meeting. subject to or otherwise chooses to comply with”: The Thus far, the items on the agenda of the General Meeting section of the report entitled ‘KONGSBERG’s Policy’ has not required this. The Chair of the Board is always 2. “information on where the recommendations and regula- present to respond to any questions. Other board members tions mentioned in no. 1 are available to the public”: The participate on an ad hoc basis. From the Group’s perspec- section of the report entitled ‘KONGSBERG’s Policy’ tive, this is considered to be sufficient. 3. “the reason for any non-conformance with recommenda- The other departure refers to Article 8 of the Articles tions and regulations mentioned in no. 1”: The section of of Association, which specifies that the General Meetings the report entitled ‘Deviations from the code of practice’ are to be chaired by the Chair of the Board. If the Chair is 4. “a description of the main elements in the enterprise’s absent, the General Meeting is chaired by the Board’s and, for enterprises that prepare consolidated accounts, Deputy Chair. In the absence of both, the chair shall be if relevant also the Group’s internal control and risk elected by the General Meeting. This is a departure from management systems linked to the accounts reporting the recommendation regarding an independent chair. The process”: The section of the report entitled Item 10 ‘Risk arrangement has been adopted by the shareholders through management and internal control’ a unanimous resolution of the General Meeting and has 5. “articles of association that completely or partially extend worked satisfactorily thus far. or depart from provisions stipulated in Chapter 5 of the Public Limited Companies Act”: The section of the report entitled Item 6 ‘General Meeting’ 6. “the composition of the Board of Directors, corporate 1 Report on corporate governance assembly, shareholders’ committee/supervisory board and control committee and any working committees that these bodies have, as well as a description of the main The description of the main features is generally structured elements in prevailing instructions and guidelines for the like the Code of Practice. As recommended, more details bodies’ and any committees’ work”: The section of the are provided on the individual points. Item 16, ‘Management report entitled Item 8 ‘Board of Directors – composition and in-house procedures’, is not covered by the recom­ and independence’ and Section 9 ‘The Board’s work’ mendation. It has nonetheless been included because it is 7. “articles of association that regulate the appointment considered crucial to KONGSBERG’s discussion of cor­ and replacement of directors”: The section of the report porate governance. entitled Item 8 ‘Board of Directors composition and inde- We actively strive to comply with international “best pendence’ practice” standards when we draw up our governance documents, since we feel there is a close correlation

90 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

between high-quality systems of governance and our value creation. 3 Share capital and dividends The topic of corporate governance is subject to annual evaluation and discussion by the Board. The following report was carried at the Board meeting on 5 February 2015. Equity At 31 December 2014, the Group’s equity came to MNOK Value platform 6,282 (MNOK 6,657), which is equivalent to 31.1 (38.2) per The Group’s vision is ”World Class – through people, tech- cent of total assets. The Board of Directors considers this nology and dedication”. The values that support this vision satisfactory. At any given time, the company’s need for are: Determined, Innovative, Collaborative and Reliable. financial strength is considered in the light of its objectives, These values are important for developing a healthy, strong strategy and risk profile. corporate culture and thereby for providing a platform for good corporate governance. Further information about Dividend policy our values can be found on the Group’s website at www. The Board decided on a dividend policy that stipulates that kongsberg.no and in the Group’s Annual and Sustainability dividends shall over time amount to between 40 and 50 per Report for 2014. cent of the company’s ordinary profit for the year after tax. In determining the size of the dividends, account will be Ethics and corporate social responsibility taken of expected future capital requirements. The dividend The Group’s current ethical guidelines were approved by the policy was made effective from the 2013 financial year. Board of Directors in February 2015. They are based largely The General Meeting approves the annual dividend, on international initiatives and guidelines related to social bas­ed on the Board’s recommendation. The proposal is the responsibility which the Group has endorsed, including the ceiling for what the General Meeting can approve. UN Global Compact, the OECD Guidelines for Multinational A dividend of NOK 5.25 per share was paid for 2013, Enterprises and the ILO Conventions. The guidelines include consisting of NOK 4.25 per share as ordinary dividends and the topics of human rights, worker’s rights, climate and NOK 1.00 per share as an extraordinary dividend in connec- en­­vironment, corruption, our relations with customers, tion with the Group’s 200th anniversary. sup­plier and market representatives, legal competence and The Board recommends to the General Meeting to pay confidentiality. They apply to the Group’s directors, man­ an ordinary dividend for the 2014 financial year of agers, employees, all contracted personnel, consultants, NOK 4.25/share (4.25) and an extraordinary dividend of agents and lobbyists and others who act on behalf of NOK 5.00/share (1.00) – a total of NOK 9.25/share (5.25). KONGSBERG. See the detailed description in the Annual The ordinary dividends and total dividends constitute 42.7 and Sustainability Report for 2014. per cent and 93.0 per cent, respectively of the annual The Group’s policy for sustainability and corporate social profit before impairment losses. The ordinary dividends and responsibility is adopted by the Board. The policy is an total dividends constitute 58.4 per cent and 127.1 per cent, inte­gral part of the Group’s strategic processes and is respectively, of the annual profit. discussed in more detail in the Group’s Annual and In the assessment of the extraordinary dividend, the Sustainability Report and on the Group’s website. Board took a basis in KONGSBERG’s strong balance at the end of 2014 and the need for being able to support the company’s growth strategy going forward. The Board’s conclusion is that there is room for a certain adjustment 2 Operations of the company’s capital structure while at the same time having sufficient financial capacity for the possibilities that may arise. On this basis, the Board decided on an extra­ Kongsberg Gruppen ASA is a company whose object is ordinary dividend of NOK 5.00/share. to engage in technological and industrial activities in the maritime, defence and related sectors. The company Board authorisations may participate in and own other companies. The above-­ Capital increase mentioned is stated in Section 3 of KONGSBERG’s Articles The Board has not been authorised to issue shares. of Association. The Articles of Association are available on the Group’s website at, www.kongsberg.com. Purchase of treasury shares The Group’s objectives and main strategies are described The General Meeting can authorise the Board to acquire up in the Group’s Annual and Sustainability Report and on the to 10 per cent of its own shares. Group’s website, www.kongsberg.com. At the Annual General Meeting on 9 May 2014, the Board was given authorisation to acquire treasury shares up to a value of MNOK 7.5. This is equivalent to five per cent of the share capital. The authorization can be used several times and applies up until the next Annual General Meeting, but not later than until 30 June 2015. The Board’s acquisition of treasure shares pursuant to this authorization can

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be exercised only between a minimum price of NOK 25 and business associates or transactions. a maximum NOK 300 per share. At 31 December 2014, the • The director’s fee shall not be linked to the financial per- Group owned a total of 26,674 (66,699) treasury shares. formance of the Group and options shall not be allocated The shares were purchased for the employee share to Board members. programme and in connection with the company’s long- • Cross relationships between directors, the CEO or other term incentive (LTI) arrangement, but can also be sold on executives shall be avoided. the market. The shares included in the Group’s employee • Board members shall not have or represent significant share programme are offered to all employees at a discount business relations with the Group. (20 per cent), and they are subject to a one-year lock-in If a director is in doubt about his/her legal competence, the period from the date of acquisition. The LTI scheme is question shall be discussed by the entire Board. The conclu- discussed in Note 28 and Item 12 of this report. sion on the question of disqualification shall be recorded in the minutes.

The Norwegian Government as customer and 4 Equal treatment of shareholders shareholder and transactions between related parties The Norwegian Government has a stake of 50.001 per cent of KONGSBERG at the same time as it is a major account, particularly with regard to deliveries to the Norwegian Class of shares Armed Forces. Relations with the Armed Forces are of a The Group’s shares are all Class A shares. All shares carry purely commercial nature and are not affected by the the same rights in the company. At general meetings, each ownership structure. share carries one vote. The nominal amount per share is The Group has quarterly meetings with the Norwegian NOK 1.25. The Articles of Association place no restrictions state, as represented by the Ministry of Trade, Industry and on voting rights. Fisheries. The topics discussed at these meetings are first and foremost the Group’s financial development, and there Trading in treasury shares are briefings on strategic questions related to KONGSBERG. The Board’s mandate to acquire treasure shares is based The Government’s expectations regarding investment per- on the assumption that acquisitions will take place in the formance and yield are also communicated. These ‘one-­­on- market. Acquired shares may be disposed of in the market, one’ meetings with the Government are compar­able to what as payment for acquisitions, and through share schemes for is customary between a private company and its principal the Group’s employees. shareholders. The meetings comply with the provisions specified in company and securities legislation, not least Transactions with related parties with a view to equal treatment of shareholders. A meeting The Board is not aware of any transactions in 2014 between on corporate social responsibility is held once a year. the company and shareholders, directors, executive person- The requirement regarding equal treatment of the share- nel or parties closely related to such individuals that could holders limits the possibilities for exchanging data between be described as material transactions. If such a situation the company and the Ministry. As a shareholder, the Gov- were to arise, the Board would ensure that an independent ernment does not usually have access to more information valuation is made by a third party. For further information, than what is available to other shareholders. However, that see Note 29 (28) and Note 33 (34) to the consolidated does not preclude discussions on matters of importance to financial statements for 2014. society. Under certain circumstances, i.e. when Government participation is imperative and the Government must obtain Guidelines for directors and executives an authorisation from the Storting (Norwegian parliament), The Corporate Code of Ethics discusses this topic under from time to time, it will occasionally be necessary to give conflicts of interest under Item 1.6. Similarly, this applies the Ministry insider information. In such cases, the Govern- to Item 8 of the Board’s instructions – independence and ment is subject to the general rules for dealing with such disqualification. Here, it is emphasised that the Board shall information. act independently of special interests. Independence in this context is defined as follows: • Board members shall normally not receive any other remuneration than their directors’ fee and remuneration 5 Freely negotiable for work on Board committees. Any departure from this general rule requires the approval of the entire Board and shall be recorded in the minutes. When material transac- The shares are freely negotiable, with the exception of tions take place between the company and a director or shares purchased by employees at discount, and shares the CEO, an independent valuation shall be obtained from allocated in connection with the company’s long-term a third party. incentive (LTI) scheme, see Items 3 and 12. The Articles of • Board members shall inform the Board about any rela- Association place no restrictions on negotiability. tionships with or interests in KONGSBERG’s significant

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deadline for sending the notification of the General Meet- 6 General Meetings ing. Please specify also the reason that there is a wish to have the question put on the agenda. The minutes from the General Meeting will be posted on the Group’s website at Through the General Meeting, shareholders are ensured www.kongsberg.com. participation in the Group’s supreme governing body. The Articles of Association are adopted by this body. Share­ holders representing at least 5 per cent of the shares can call for an extraordinary general meeting. 7 Nominating Committee

Notification The Annual General Meeting is ordinarily held by 1 June Article 9 of the Group’s Articles of Association specifies each year. In 2015, the Annual General Meeting is scheduled that the Group shall have a Nominating Committee. The to be held on 7 May 2015. Committee’s work is regulated by special instructions • Notification is usually distributed 21 days in advance of adopted by the General Meeting. These instructions were the General Meeting at the latest. The relevant doc­­ last revised by the Annual General Meeting on 8 May 2007. uments, including the Nominating Committee’s well-­ The Nominating Committee’s main responsibility is to founded roster of nominees when new candidates are submit a roster of nominees to the General Meeting for the up for election or existing members are up for re-election, shareholder-elected members of the Board of Directors and are available on the Group’s website at their deputies. The nominations shall be reasoned and www.kongsberg.com recommend a nominee for the Chair of the Board separate- • It is important that the documents contain all the infor- ly. In the work on finding candidates for the Board, the mation required for the shareholders to take a position Committee is in contact with relevant shareholders, board on all items on the agenda. The company’s Articles of members and the CEO. Association stipulate that the deadline for registration can In addition, the Nominating Committee shall submit pro­ expire no earlier than five days prior to the date of the posals for the remuneration of Board members and their General Meeting. Efforts are made to set the deadline as deputies, and make an annual evaluation of the work of the close to the meeting date as possible. Board. All shareholders registered in the Norwegian Central Securi- The Nominating Committee consists of three members ties Depository (VPS) receive the notice and are entitled to who shall be shareholders or representatives of sharehold- submit motions and to vote directly or by proxy. The ers. The General Meeting shall elect all members of the Financial Calendar is published on the Group’s website. Nominating Committee, including the chair. The Nominating Committee itself proposes to the General Meeting a roster Registration and proxies of nominees for the Committee. The term of office is two Registration can be done by written notice, fax or online. years. The Nominating Committee’s remuneration is The Board of Directors would like to make it possible for as approved by the General Meeting based on the Board’s many shareholders as possible to participate. Shareholders recommendation. who are unable to attend the meeting are urged to authorize a proxy. A special proxy slip has been drawn up Composition to facilitate the use of proxies on each individual item on the The current Committee was elected by the Annual General agenda. A person is appointed to vote as a proxy for the Meeting on 9 May 2014 and consists of: shareholders. Representatives of the Board, at least one • Alexandra Morris, senior portfolio manager ODIN member of the Nominating Committee and the auditor will Forvaltning (re-elected) attend the General Meeting. Management is represented by • Morten S Bergesen, managing director in Havfonn AS the Chief Executive Officer and the Chief Financial Officer, (new) at the very least. • Morten Strømgren, department director in the Ministry In 2014, the General Meeting was held on 9 May and 77.5 of Trade, Industry and Fisheries (new) per cent (78.4) of the aggregate share capital was • Morris was elected chair of the Committee. represented. A total of 95 (95) shareholders were present None of the Committee’s members represents or represented by proxies. KONGSBERG’s management or Board. The majority of the members are considered to be independent of daily man- Agenda and execution agement and Board. Morten S Bergesen is the managing The agenda is set by the Board, and the main items are director of Havfonn AS, which owns a 26.02 per cent share specified in Article 8 of the Articles of Association. The same in Arendals Fossekompani ASA. Morten S Bergesen is also article stipulates that the Chair of the Board will chair the a board member in Arendals Fossekompani ASA, where General Meeting. The CEO reviews the status of the Group. KONGSBERG’s director Morten Henriksen has a leading All shareholders are entitled to have their questions dealt position. The Nominating Committee is considered to have with at the General Meeting. Questions shall be submitted a composition that reflects the common interests of the in writing to the Board a minimum of seven days prior to the community of shareholders.

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Information about the Nominating Committee, a slip for Among the shareholder-elected directors, there are three nominating candidates for the Board and the deadlines are men and two women, i.e. 40 per cent women. available on the Group’s website at www.kongsberg.com. Election of the Board of Directors The General Meeting elects the five shareholder-elected representatives to the Board. The Nominating Committee 8 Composition and independence of draws up a roster of shareholders’ nominees for the Board the Board of Directors prior to the election. The roster of nominees is sent to the shareholders along with the notification of the General The Annual General Meeting in 1999 resolved to discontinue Meeting. Decisions on the composition of the Board take the Corporate Assembly. The reason was an agreement be- place by simple majority. The government currently owns tween the unions and the Group that increased the number some 50 per cent of the shares, and could, in principle, of employee representatives on the Board from two to three. control the election of the shareholder-elected directors. Three of the directors are elected directly by and from Composition of the Board of Directors among the Group’s employees. The Board of Directors consists of eight members and The directors are elected for two-year terms and are currently has the following composition; Finn Jebsen eligible for re-election. All shareholder-elected directors will (Chair), Anne-Lise Aukner (Deputy Chair), Irene Waage be up for election in 2015. Basili, Roar Flåthen and Morten Henriksen. Magnar Hovde, Helge Lintvedt and Roar Marthiniussen are directors who The directors’ shareholdings have been elected by and from among the employees. At 31 December 2014, the shareholder-elected directors Detailed information on the individual directors can be found held the following portfolios of shares in the Group: on the website at www.kongsberg.com. Finn Jebsen, Chair of the Board, owns 20,000 (20,000) Participation in Board meetings and Board Committees shares through his wholly-owned company Fateburet AS. in 2014: The employee-elected directors had the following holdings of KONGSBERG shares at 31 December 2014: Participation in Board Audit Compensation Roar Marthiniussen owned 5,269 (5,004) shares and meetings meetings Committee Committee Magnar Hovde owned 80 (80) shares.

Finn Jebsen 10 2 Anne-Lise Aukner 9 7 Irene Waage Basili 10 9 The Board’s work Roar Flåthen 10 2 Morten Henriksen 10 7 Roar Marthiniussen 10 2 The Board’s responsibilities Magnar Hovde 10 The Board of Directors bears the ultimate responsibility for Helge Lintvedt 10 7 managing the Group and for monitoring day-to-day admini­ stration and the Group’s business activities. This means that It is important that the entire Board has the expertise the Board is responsible for establishing control systems required to deal with Board work and the Group’s main and for the Group operating in compliance with the adopted business activities. value platform and the Corporate Code of Ethics, as well In addition, the directors need to have the capacity to as in accordance with the owners’ expectations of good carry out their duties. According to the Articles of Associa- corporate governance. First and foremost, the Board tion, the Group shall have five to eight directors. The CEO of Directors protects the interests of all shareholders, but is not a member of the Board of Directors. it is also responsible for safeguarding the interests of the The directors are elected for two-year terms and elect Group’s other stakeholders. their own Chair. Finn Jebsen was elected Chair of the Board. The Board’s main responsibilities are to contribute to corporate competitiveness, and to ensure that the Group The Board’s independence develops and creates value. Further, the Board of Directors All shareholder-elected directors are considered autono- is to participate in the framing of and adopt the Group’s mous and independent of the Group’s corporate executive strategy, exercising the requisite control functions and management. The same applies relative to important busi- ensuring that the Group is managed and organised in a ness associates. Morten Henriksen has a leading position satisfactory manner. The Board sets the objectives for with Arendals Fossekompani ASA, which owned a 7.96 per financial structure and adopts the Group’s plans and cent stake in Kongsberg Gruppen ASA at year end. The budgets. The Board also handles items of major strategic or Board of Directors is favourable to long-term shareholders financial importance to the Group. In cases of a material being represented on the Board. It is important that there nature in which the Chair and other Board members have be no conflicts of interest between owners, the Board, been actively engaged, this will be disclosed in the proceed- management and the Company’s other stakeholders. ings and considered by the Board on a case-by-case basis.

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These tasks are not constant and the focus will depend on with reporting on operations, the individual units shall hold the Group’s needs at any given time. The Board hires the meetings to review operating activities. The financial report CEO, defines his or her work instructions and authority, and forms the basis for internal control and communication on sets his or her wages. status and necessary measures. Quarterly financial reports are reviewed at Board meetings, and these form the basis Instructions for the Board of Directors for external financial reporting. The Board’s instructions are subject to review every second year by the Board and are revised as needed. The current Notice of meetings and discussion of items instructions were presented to the Board in February 2015. The Board schedules regular Board meetings each year. The instructions cover the following items: the notification Ordinarily, eight meetings are held each year. Additional of Board meetings, notification deadlines, administrative meetings are held on an ad hoc basis. Ten (9) Board preparations, Board meetings, Board decisions, the keeping meetings were held in 2014. The Board meetings had of minutes, the Board’s competency and items on the 99 (95) per cent attendance in 2014. Board’s agenda, segregation of duties between the Board All directors receive regular information about the and the CEO, relations between subsidiaries and the parent Group’s operational and financial progress well in advance company, independence and disqualification, main principles of the scheduled Board meetings. The directors also receive for the work of the Board in connection with a possible monthly operations reports. The Company’s business plan, corporate takeover, confidentiality and professional secrecy, strategy and risk are regularly reviewed and evaluated by relations to legislation, the Articles of Association and the Board. The directors are free to consult the Group’s instructions. senior executives as needed. The Board draws up and The Board of Directors can decide to depart from the adopts an annual plan, including set topics for the Board instructions in individual cases. meetings. Ordinarily, the CEO proposes the agenda for each individual Board meeting. The final agenda is decided Instructions for the CEO in consultation between the CEO and the Chair of the There is a clear segregation of duties between the Board Board. and executive management. The Chair is responsible for Besides the directors, Board meetings are attended by the Board’s work being conducted in an efficient, correct the CEO, CFO, other EVPs as needed, and the General manner and in compliance with the Board’s responsibilities. Counsel (secretary of the Board). Other participants are The CEO is responsible for the Group’s operational called in on an ad hoc basis. management. The Board has prepared special instructions The Board adopts decisions of material importance to the for the CEO, which are reviewed every second year by the Group, including the approval of the annual and quarterly Board and revised as needed. The current instructions were accounts, strategies and strategic plans, the approval of presented to the Board in February 2014. significant investments, the approval of significant con- tracts and the approval of substantial business acquisitions Financial reporting and disposals. The Board of Directors receives monthly financial reports New directors are briefed on the Group’s current strategy and comments on the Group’s economic and financial and historical factors related to the current situation. status. The reports are financial presentations that describe what has happened in the Group’s operative and adminis- trative functions during the reporting period. In connection

KONGSBERG • Annual Report and Sustainability Report 2014 95 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Duty of confidentiality – communication between the The Board’s Compensation Committee Board and shareholders The Committee addresses tasks linked to the CEO’s terms The Board’s proceedings and minutes are in principle con- of employment, questions of principle related to wage fidential unless the Board decides otherwise or there is levels, the bonus system, pension schemes/terms, employ- obviously no need for such treatment. This ensues from ment contracts, etc. for executives, as well as other matters the instructions to the Board of Directors. related to compensation that the Committee believes to be of special importance for the Group. The Committee Expertise consists of the Chair of the Board, one shareholder-elected The entire Board has completed a programme to gain in- director and one employee-elected director. The CEO is sight into the Group’s business activities. In that connection, entitled to participate in the Committee’s meetings if he so the Board makes excursions to different Group locations. desires, except when his own situation is under discussion. The purpose of the excursions is to improve the Board’s Two (four) meetings were held in 2014. insight into the commercial activities in the area. Members: Finn Jebsen (Chair), Roar Flåthen, Roar Marthiniussen. The terms of reference for the Disqualification Compensation Committee are published on the Group’s The Board is bound by the rules regarding disqualification website at www.kongsberg.com. as they appear in Section 6-27 of the Public Limited Com- panies Act and in the instructions to the Board. In 2014, The Board’s self-evaluation no directors were recused due to disqualification. The Board has one extended meeting each year to evaluate the work done by the Board and the CEO. In this connec- Use of Board Committees tion, the Board also holds its own activities up for com­ The Board has two subcommittees, an Audit Committee parison with the Norwegian Code of Practice for Corpo- and a Compensation Committee. Both committees prepare rate Governance. Individual performance interviews are items for consideration by the Board. They are responsible conducted each year between the Chair of the Board and only to the Board as a whole and their authority is limited the other directors. to making recommendations to the Board.

The Board’s Audit Committee The Audit Committee shall support the Board of Directors 10 Risk management and internal control in its responsibilities related to financial reporting, audits, internal control and overall risk management. The Commit- tee consists of two shareholder-elected directors and one The Board’s responsibilities and the purpose of employee-elected director. The CFO and the independent internal control auditor usually attend the meetings. The CEO and the other KONGSBERG’s internal control and risk management directors are entitled to attend if they so desire. Seven (six) system for financial reporting are based on the internation- meetings were held in 2014. ally recognised framework COSO. Members: Anne- Lise Aukner (Chair), Morten Henriksen, The Group has established a decentralised management Helge Lintvedt. The terms of reference for the Audit model featuring delegated responsibility for profits. As a Committee are published on the Group’s website at result, the control function parallels the Group’s manage- www.kongsberg.com. ment model, and it is the individual unit’s responsibility to

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make sure that it has the capacity and expertise it requires The Group has an Ethics Committee whose purpose is to carry out responsible internal control. to promote high ethical standards and good behaviour, A general management document has been adopted, and to ensure that KONGSBERG maintains a good describing how the requirements for internal control estab- reputation. lish a framework for the units’ responsibilities. Management prepares monthly financial reports that are sent to the directors. In addition, quarterly financial reports are prepared for 11 Remuneration of the Board of Directors the financial market. When the Group’s quarterly financial reports are to be presented, the Audit Committee reviews the reports prior to the Board meeting. The auditor takes The Annual General Meeting approves the remuneration part in the Audit Committee’s meetings and meets with paid to the Board of Directors each year. The proposal for the entire Board in connection with the presentation of the remuneration is made by the chair of the Nominating interim annual financial statements, and when otherwise Committee. In 2014, total remuneration to the Board came required. to NOK 1,883,333 (NOK 1,785,715). The remuneration breaks down as follows: Chair of the Board NOK 414,000 The Board’s annual review and reporting (NOK 399,333), Deputy Chair NOK 227,333 (NOK 219,333), The annual review of the strategic plans of the Board other directors NOK 207,000 (NOK 199,667). forms the basis for the Board’s discussions and decisions In addition, the members of the Audit Committee receive throughout the year. Reviewing the Group’s risks is part of NOK 9,300 (NOK 9,000) per meeting, and a maximum this annual review. In addition, quarterly reviews are made of NOK 46,500 (NOK 45,000) per year. The Committee’s the operative risks. HSE matters are reviewed by the Board chair receives NOK 10,600 (NOK 10,200) per meeting, on a quarterly basis. and a maximum of NOK 53,000 (NOK 51,000) per year. The Board conducts an annual review of the Group’s The members of the Compensation Committee receive key governance documents to ensure that these are updat- NOK 8,600 (NOK 8,000) per meeting, and a maximum of ed and cover the relevant topics. Risk assessment and the NOK 43,000 (NOK 40,000) per year. The Committee’s status of the Group’s work on compliance and corporate chair receives NOK 9,800 (NOK 9,200) per meeting, and social responsibility are reported to the Board annually. a maximum of NOK 49,000 (NOK 46,000) per year. The Group’s financial position and risks are thoroughly The directors’ fees are not contingent on financial described in the Directors’ Report. per­formance, option programmes or the like. None of the Board’s shareholder-elected directors works for the Compliance with values, ethics and corporate social company outside of their directorships, and no one has any responsibilities agreement regarding a pension plan or severance pay from At KONGSBERG, we emphasise that our values and the company. Code of Ethics are to be an integral part of our operations. We expect our employees and partners to demonstrate high ethical standards and compliance with applicable rules and regulations. 12 Remuneration of executive management In 2014, we continued our work on systematic develop- ment and follow-up of important areas for compliance with regulations, rules and internal guidelines. The Group placed Guidelines emphasis on the anti-corruption programme; including The Board has drawn up special guidelines for the determi- training of own employees and business partners, com­pli­ nation of salaries and other remuneration to executive ance with corporate social responsibility in the supplier management. The CEO’s terms of employment are de­ter­ chain and implementation of routines for follow-up of mined by the Board. Each year, the Board undertakes human and worker’s rights. In 2014, we evaluated our anti-­ a thorough review of salary and other remuneration to the corruption programme using external advisers. The CEO. The evaluation is based on market surveys of com­ evaluation showed that we have a satisfactory programme parable positions. with regard to internationally recognised statutes and frame- The structure of the incentive system for the other mem- work. Some areas of improvement were identified in our bers of corporate executive management is determined by programme, and adapted measures will be implemented. the Board and presented to the Annual General Meeting for The Group has compliance functions at both a corporate information purposes. The terms are determined by the level and in the business areas. In the same way as the CEO in consultation with the Chair of the Board. financial reporting, the internal control was established in The Board’s attitude to executive management’s salaries accordance with a decentralised management model. The is that they should be competitive and provide incentive, KONGSBERG compliance programme is coordinated and but not be at the very top end of the scale. monitored from a corporate level. The incentive system consists of basic wages, bonuses, Routines have been established for notification and pensions, LTI, severance arrangements and other benefits follow-up on any alleged misconduct. in kind.

KONGSBERG • Annual Report and Sustainability Report 2014 97 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

The guidelines for determining salaries and other remunera- Other market information tion to executive management are presented to the General Open investor presentations are conducted in connection Meeting. The guidelines are binding for the LTI arrangement with the Group’s annual and quarterly reports. The CEO re- and serve as a recommendation for the rest. views the results and comments on markets and prospects for the future. The Group’s CFO also participates in these Performance-based compensation presentations, as do other members of corporate executive In 2006, the Board introduced a new bonus system for management from time to time. executive management. Performance-based compensation The annual and quarterly reports are published on the is linked to the performance trend, profit margin and non- Group’s website at the same time as the presentation of the financial goals. The payment of performance-based salary results. The annual and mid-year results are also presented has a ceiling of 50 per cent of the basic salary. For a more through webcasts. Beyond this, the Group conducts an detailed description of the system, see Note 28 (27) to ongoing dialogue with and makes presentations to analysts consolidated financial statements for 2014. Altogether, the and investors. Group has approx. 90 (90) managers who are covered by Informing owners and investors about the Group’s pro- an incentive plan that includes an element of individual gress and economic and financial status is considered to be performance. of great importance. Attention is also devoted to ensuring that the equity market gets the same information at the Long-term incentive (LTI) same time. The prudence principle is applied to guarantee The Board of Directors decided in 2012 to introduce a impartial distribution of information when communicating long-term incentive (LTI) scheme as part of the regular with shareholders and analysts. remuneration for the CEO and other members of corporate The Group has a separate Investor Relations Directive, executive management. The remuneration constitutes 25 which includes sections on communication with investors per cent of annual base salary for the CEO and 15–20 per and how price-sensitive information is to be treated. cent for other members of corporate executive manage- The Board of Directors has prepared special guidelines for ment. The rationale is to be competitive with comparable the Group’s contact with shareholders outside the General companies. A more detailed description of the arrangement Meeting. is provided in Note 28 (27) to the consolidated financial statements for 2014.

Conditions 14 Take-overs Remuneration to corporate executive management and the Board is described in Note 29 (28) to the consolidated financial statements for 2014. There are no defence mechanisms against take-over bids in the Group’s Articles of Association, nor have other mea­ sures been implemented to limit the opportunity to acquire shares in the company. The Norwegian government owns 13 Information and communications 50.001 per cent of the shares. The marketability of these shares is subject to parliamentary discretion. The Board’s instructions contain an item that refers to the guiding The Annual Report and Accounts – interim reporting principles for how the Board of Directors shall react in the The Group usually presents preliminary annual accounts in event of any take-over bid. The Board of Directors is late February. Complete accounts, the Directors’ Report and responsible for ensuring that KONGSBERG’s shareholders the Annual Report are sent to shareholders and other are treated equally and that operations are not disrupted stakeholders in March/April. Beyond this, the Group unnecessarily. presents its accounts on a quarterly basis. The Financial Where a bid is made for the company, the Board of Calendar is published on the Group’s website and in the Directors shall draw up a statement containing a well-­ Annual Report. The Group’s Report on Corporate Social grounded evaluation of the bid and, if need be, provide an Responsibility is published on the Group’s website (pdf independent third-party assessment. version), along with other information on sustainability and The evaluation shall specify how, for example, a take-over corporate social responsibility, as well as in a limited number would affect long-term value creation at KONGSBERG. of paper copies. The report is verified by a third party. If a bid is made for the Company’s shares, the Company All shareholders are treated equally as a matter of course. will not limit others from presenting similar bids for the Company’s shares, unless this is clearly justified as being in the Company’s and shareholders’ common interest. In the event of a bid for the Company’s shares, the Company will publish the required disclosures pursuant to legislation and regulations for companies listed on the Oslo Stock Exchange.

98 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Corporate executive management’s main responsibility 15 Auditor is the operational management of the Group, where KONGSBERG’s overall situation is decisive for the decisions that are made. Corporate executive management’s other The auditor’s relationship to the Board responsibilities include strategic development of the Group, The Group’s auditor is elected by the General Meeting. the evaluation and development of the Group’s business A summary of the main aspects of the work planned by the areas and issues of principle importance to the Group. auditor shall be presented to the Audit Committee once a Corporate executive management evaluates its own work year. and working methods annually. The auditor is always present at the Board’s discussions Corporate executive management meets regularly, and of the preliminary annual accounts. At that meeting, the otherwise has regular contact on an operational basis. Board is briefed on the interim financial statements and any Corporate executive management conducts monthly other issues of particular concern to the auditor, including follow-up of results and budgets with the various profit any points of disagreement between the auditor and centres in the Group. The Group subscribes to the general management. The auditor also participates in the meetings principle of making binding commitments to agreed targets, of the Audit Committee. so it practices a decentralised form of corporate govern- The Audit Committee arranges annual meetings with the ance that gives individual units considerable autonomy, auditor to review the report from the auditor that addresses accompanied by the responsibility that entails. the Group’s accounting policy, risk areas and internal control routines. Executive Steering Group (ESG) At least one meeting a year will be held between the In 2013, the Group established an Executive Steering Group auditor, the Audit Committee and the Board without the (ESG) for each business area. The aim is to improve presence of the CEO or other members of executive routines for decision-making and follow-up, among other management. things, by transferring several important decisions related to The auditor submits a written statement to the Board on the individual business area to the relevant business area’s compliance with the Statutory Audit Independence and ESG. The ESGs are chaired by the CEO. Other permanent Objectivity Requirements, cf. the Auditing and Auditors Act. members are the CFO and EVP Business Development and The Board of Directors has dealt with the guidelines for EVP Staff. Another two or three other EVPs from Cor­ the business relationship between the auditor and the porate Executive Management attend, depending on the Group. agenda. Participants in the ESGs include the head of the Ernst & Young is the Group auditor. Some smaller com­ relevant business area as well as all or part of the relevant panies within the Group use other audit firms. In addition business area’s executive management. to ordinary auditing, the auditing company has provid- ed consultancy services related to accounting. For further Intra-Group Boards of Directors information, see Note 30 (29) to the consolidated financial The Group’s subsidiaries have their own Boards of Directors, statements. which are comprised of internal managers and employees. At regular intervals, the Board of Directors evaluates The president of the holding company or a person author- whether the auditor exercises a satisfactory level of control ised by the president will chair the Board of the subsidiary. and the auditor’s competitiveness otherwise. Appointments of the Boards and the Board work in sub- sidiaries are handled pursuant to the Group’s principles for good corporate governance.

16 Management and internal routines Guidelines for share trading The company has stipulated in-house guidelines for trading in the company’s shares. These guidelines are updated This point is not covered by the Code of Practice. regularly to maintain compliance with the legislation and regulations that apply at any given time. The Group has in- Chief Executive Officer house guidelines for primary insiders, which require internal The Board has adopted instructions for the CEO, cf. Item 9. clearance by the CEO before primary insiders can buy or sell KONGSBERG shares. Corporate executive management Corporate executive management currently consists of nine individuals. In addition to the CEO, corporate executive management consists of the CFO, the presidents of the four business areas (Kongsberg Maritime, Kongsberg Oil & Gas Technology, Kongsberg Defence Systems and Kongsberg Protech Systems), EVP Business Development, EVP Public Affairs, EVP Staffs. The CEO appoints members to corporate executive management.

KONGSBERG • Annual Report and Sustainability Report 2014 99 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information INFORMATION SHAREHOLDER’S

“KONGSBERG shall have a profile that ensures reliability and predictability in the stock market.”

100 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

SHARES AND SHAREHOLDER INFORMATION

KONGSBERG’s share price closed at NOK 123.00 at year-end 2014. Including the dividend of NOK 5.25, the return was 0.6 per cent in 2014 compared with an overall increase on the Oslo Stock Exchange Benchmark Index (OSEBX) of 5.3 per cent.

Shareholder policy Exchange Industrial Index (OSE20GI) increased by 5.3 per KONGSBERG’s objective is to maintain and enhance cent and decreased by -6.2 per cent, respectively, during stakeholder value through profitable and growth-oriented 2014. industrial development in a long-term and international perspective. Good corporate governance and corporate management shall secure the greatest possible value added and reduce business related risk while the company’s Share price trends in 2014 NOK (Indexed at NOK 100 – 1 January 2014) resources shall be utilised in an effective and sustainable manner. The Group shall achieve its goals through further 140 KONGSBERG prosent Driftsinntekter i Norge development of first-class competency centres, deliveries OSEBX Driftsinntekter utenfor Norge of leading systems, products and services in its international 120 market segments as well as through running the business OSE EBITDA % in an ethical, environmental and social responsible man- 100

ner. Growth shall come through internal development and 80 acquisitions within selected strategic market segments. The Group shall be among the leading actors worldwide within 60 its areas of commitment. Q1 Q2 Q3 Q4 KONGSBERG shall have a profile that ensures reliability and predictability in the stock market. Shareholders shall be assured a long-term, competitive return of investment to the related risk. The company’s objective is that dividends over time shall constitute between 40 and 50 per cent of Share price trends from the launch on the Oslo Stock Exchange NOK (Indexed at NOK 100 – 13 December 1993) the company’s net result.

2 500 KONGSBERG prosent Driftsinntekter i Norge Share price trend in 2014 2 000 OSEBX Driftsinntekter utenfor Norge KONGSBERG’s market capitalisation declined during the Historisk utvikling i driftsinntekter og EBITDA year from MNOK 15,300 to MNOK 14,760 (-3.5 per cent). 1 500 OSE NOK millioner OSEBX EBITDA % KOG KONGSBERG was listed on the Oslo Stock Exchange on 1 000 OSEBX 13 December 1993 and had a market capitalisation of KONGSBERG 20 000 20 500 MNOK 643 at the time. The share price dropped by NOK 15 000 15 4.50 in 2014 and ended at NOK 123.00 at year-end, down 0 from NOK 127.50 at the end of 2013. The Oslo Stock 13.12.1993 1998 2002 2006 2010 2014 10 000 10 Exchange Benchmark Index (OSEBX) and the Oslo Stock 5 000 5

0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Dividend and net profit per share

NOK 2014 2013 20121) 20111) 2010 2009 2008 2007 2006 2005 Historisk utvikling i driftsinntekter og EBITDA Ordinary earnings per share 7.28 10.24 10.91 11.83 12.46 6.83 4.86 4.04 NOK 2.08 millioner 1.80 Dividends 9.253) 5.252) 3.75 3.75 3.75 2.00 1.38 1.25 0.63 0.54 20 000 20

1) The numbers have been restated as described in Note 33, “Change in comparative figures”. This change has not been taken into account for other years. 15 000 15 2) Consists of NOK 4.25 per share in ordinary dividends and NOK 1.00 per share as an extraordinary dividend to celebrate the Group’s 200th anniversary. Drif EBITtsinntekterA % Norge 3) Consists of NOK 4.25 per share in ordinary dividends and NOK 5.00 per share as an extraordinary dividend. 10 000 Driftsinntekter10 utenfor Norge 5 000 5

KONGSBERG • Annual Report and Sustainability0 Report 2014 101 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Drif EBITtsinntekterA % Norge Driftsinntekter utenfor Norge 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Share capital correct valuation of the share. The Group emphasises Kongsberg Gruppen ASA has a share capital of MNOK 150, maintaining an open dialogue with the equity market and comprising 120 million shares with a nominal value of media through stock exchange disclosures, press releases NOK 1.25 per share. There is one class of shares, and and other media initiatives, as well as through presentations there are no limitations on voting rights. At year-end 2014, for analysts and investors. KONGSBERG owned a total of 26,674 treasury shares. The Group’s website, www.kongsberg.com, has a separate section featuring investor information. The section Employees as shareholders contains the Group’s annual reports, interim reports and Employee ownership in KONGSBERG is considered very company presentations. In 2014, KONGSBERG organised favourable and an employee share programme is conducted presentations and met with owners and potential investors each year. In the summer of 2013, the Group’s annual both in Norway and abroad. KONGSBERG aspires to be employee share programme was conducted for the 18th accessible to all market players, and parts of corporate time. All employees were given the opportunity to buy management are present at most such events. The quarter- KONGSBERG shares at a 20 per cent discount. A total of ly presentations are made available by webcast. In 2014, 497,389 shares were sold at a discounted price of NOK KONGSBERG placed number three in the category “Best 113.20 to 2,112 employees. Norwegian company, Large Cap” in the IR Nordic Markets’ At year-end 2014, more than 2,200 employees owned annual ranking. more than 3.6 million KONGSBERG shares. This represents In November 2014, Kongsberg organised its annual 3 per cent of the company’s shares. Capital Markets Day at its premises in Kongsberg. The event was well attended. Several members of the corporate Investor relations management board gave presentations as well as demon- KONGSBERG shall provide the equity market with relevant, strations of some of the products and systems. A capital comprehensive information as the basis for a balanced, Markets Day will also be organised in 2015.

Historical share information

Amounts in NOK 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005

Market capitalisation 31 Dec. (in million) 14 760 15 300 14 940 13 920 15 960 10 590 9 840 10 170 5 250 3 720 Change during the year (3.5%) 2.4% 7.3% (12.8%) 50.7% 7.6% (3.2%) 93.7% 41.1% 25.3% Closing share price 31 Dec. 123.00 127.50 124.50 116.00 133.00 88.25 82.00 84.75 43.75 31.00 Closing share price first trading day 128.00 123.00 113.50 135.00 91.25 82.25 84.75 42.50 31.25 24.75 Highest closing price 151.00 135.00 127.50 164.00 135.00 88.25 104.25 86.25 43.75 33.00 Lowest closing price 117.00 103.00 96.25 93.00 80.75 62.00 66.75 41.75 30.50 22.75 Average daily closing price 136.22 117.62 112.59 132.31 113.50 72.80 85.10 60.88 36.45 27.09 Volume (in 1000 shares) 13 322 13 991 9 927 13 698 14 024 12 029 12 230 16 938 11 960 21 188 As a per cent of outstanding shares1) 22.20% 23.3% 16.5% 22.8% 23.4% 20.0% 20.4% 28.2% 19.9% 35.3% Number of transactions 36 955 38 205 28 949 37 189 25 836 9 310 14 810 5 158 1 980 3 345 Number of trading days 253 249 251 253 252 251 252 250 225 247

1) Of shares in circulation. The Norwegian state’s interest of 50.001 per cent (60 001 600 shares) is not included.

Historical development – revenues and EBITDA MNOK

20 000 20 per cent Operating revenues, Norway Operating revenues, 15 000 15 outside Norway

10 000 10 EBITDA margin %

5 000 5

0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

102 KONGSBERG • Annual Report and Sustainability Report 2014

Drif EBItsinntekterTA % Norge Driftsinntekter utenfor Norge

Historisk utvikling i driftsinntekter og EBITDA NOK millioner

20 000 20

15 000 15

10 000 10

5 000 5

0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

DrifEBITtsinntekterA % Norge Driftsinntekter utenfor Norge 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

List of KONGSBERG’s largest shareholders at 31 December 2014

Shareholders Number of shares Percentage

The Norwegian State, represented by the Ministry of Trade, Industry and Fisheries 60 001 600 50.00% Arendals Fossekompani ASA 9 552 796 7.96% The National Insurance Fund 7 338 325 6.12% MP Pensjon PK 4 742 800 3.95% The Northern Trust Co 2 471 860 2.06% J.P. Morgan Chase Bank N.A. London 1 878 330 1.57% Danske Invest Norske Instit. II 1 809 696 1.51% Odin Norden 1 592 821 1.33% Reassure Limited 1 178 300 0.98% Odin Norge 1 152 181 0.96% Skagen Vekst 1 056 509 0.88% Danske Invest Norske Aksjer Inst 1 013 839 0.84% BNP Paribas Sec. Services S.C.A 928 500 0.77% State Street Bank & Trust Co. 821 964 0.68% Montague Place Custody Services 722 777 0.60% Odin Global 643 171 0.54% KLP Nordea Kapital 548 863 0.46% VPF Nordea Kapital 509 013 0.42% BNP Paribas Sec. Services S.C.A 439 500 0.37% Must Invest AS 400 000 0.33% Total 98 802 845 82.34% Other (stake < 0.35%) 21 197 155 17.66% Total number of shares 120 000 000 100.00%

Shareholders, by size of holding

Number of shares Number of owners Number of shares Holding percentage

1 - 1 000 5 912 1 710 537 1.43% 1 001 - 10 000 1 842 4 685 267 3.90% 10 001 - 100 000 189 5 020 148 4.18% 100 001 - 1 000 000 59 14 794 991 12.33% 1 000 001 - 10 000 000 11 33 787 457 28.16% Over 10 000 000 1 60 001 600 50.00% Total 8 014 120 000 000 100.00%

Share price data, by quarter 2014

Amounts in NOK 4th quarter 2014 3rd quarter 2014 2nd quarter 2014 1st quarter 2014

Opening share price 146.50 139.00 136.50 127.50 Closing price 123.00 146.50 139.00 136.50 Investment performance during the period (16.0%) 5.4% 1.8% 7.1% Highest closing price 148.00 151.00 145.00 137.00 Lowest closing price 117.00 135.50 131.00 126.00 Average closing price 131.5 143.05 138.60 132.08 Median 133.25 143.25 140.00 132.00 Volume (in 1,000 shares) 3 306 2 098 2 495 5 012

KONGSBERG • Annual Report and Sustainability Report 2014 103 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information REPORT SUSTAINABILITY

“We will continue to expand our international presence, meaning more focus on corporate social responsibility.”

Picture: Follow the Sun - regardless of the time of day, someone at Kongsberg Maritime will be on duty to answer calls for help. Three high-tech support centres in Europe, America and Asia make sure of that.

104 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

CONTENTS – SUSTAINABILITY REPORT

106 About the Sustainability Report 118 Sustainable innovation 123 What have we achieved? 131 Systems of governance and 108 CEO Walter Qvam 119 Introduction 124 Area of focus: Policy for key figures 110 The World of KONGSBERG 120 Environmental monitoring Sustainability and Corporate 132 Our corporate Code of Ethics 115 Accountability 121 Green shipping Social Responsibility 133 Organisation and systems of 116 Encouraging children and young 121 Subsea Storage Units 125 Area of focus: Anti-corruption governance people to learn more about 122 Maritime simulators 126 Area of focus: 134 Responsible taxation maths and science 122 Wind power Human rights and labour rights 135 Climate and environmental 117 Contributions to sports, culture 127 Area of focus: accounts 2014 and social causes Climate challenges 138 Targets and activities for 128 Area of focus: Sustainability and sustainability and corporate corporate social responsibility in social responsibility the supplier chain 140 Key sustainability figures 129 Area of focus: 143 External reporting Our employees 143 Global Compact 144 Global Reporting Initiative Index 148 Auditor’s Report

KONGSBERG • Annual Report and Sustainability Report 2014 105 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

ABOUT THE SUSTAINABILITY REPORT

Kongsberg Gruppen (KONGSBERG) is an international technology corporation that supplies dependable, advanced technological solutions that improve the reliability, safety and efficiency of complex operations, also under extreme conditions. KONGSBERG collaborates with global customers in the defence, maritime, oil and gas, and aerospace industries.

The purpose of this report is to give stakeholders who are affected by or interested in our activities information about KONGSBERG’s approach to sustainability and corporate social responsibility.

The report covers the period from 1 January 2014 to Process to define the content 31 December 2014, and addresses topics of importance to The content of the report is largely defined based on what us and to our stakeholders. Any significant events from we have called ‘Areas of Focus for 2014-2015’. The areas of 1 January 2015 to 20 March 2015 will also be discussed. focus are a result of the targets and activities that are dealt All figures are linked to the 2014 fiscal year. with by the Group’s Forum for Sustainability and Corporate Social Responsibility and identified by corporate executive Changes in the reporting platform since the last report management and, ultimately, by the Group’s Board. No material changes were made in the reporting platform In this report, we have also chosen to provide some from 2013 to 2014. Otherwise, please see the list of new examples of what we have called sustainable innovation. units reporting climate and environmental data on page 135. This illustrates the ‘perspective of opportunity’ in relation to the Group’s Policy for Sustainability and Corporate Social Limitations of the report Responsibility. The report is organised on the basis of the The report deals only with companies in which principles in the Global Reporting Initiative (GRI), and we KONGSBERG owns 50 per cent or more. The environmen- are affiliated with the UN Global Compact Initiative. tal data includes all of our Norwegian units, as well as all our production units all over the world and the largest offices outside of Norway. The information in the report is based on data obtained from different parts of the Group. Even though importance is attached to ensuring that the data is complete and correct, some of the information will be based on estimates.

From Rio de Janeiro

106 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

The Sustainability Report has been drawn up based on the following framework:

White Paper No. 27 (2013-2014) – Diverse and value-creating ownership The Norwegian State owns 50.001 per cent of the shares in the company. The State’s stake is managed by the Ministry of Trade and Fisheries. The process we have used to define the content of the report ensures that we are reporting in accordance with the expectations posed to us through the White Paper on ownership.

Global Compact The Group joined the UN Global Compact in 2006. This requires that we submit a report to the UN each year, describing our activities and the advances we have made in the field of sustainability. The Group’s Sustainability Report serves as such a report – a COP (Communication on Progress). We would maintain that the report complies with Global Compact’s criteria for ‘Advanced Level’. For more details about the Global Compact, see their website at www.unglobalcompact.org

Global Reporting Initiative (GRI) We use GRI’s guidelines for voluntary reporting on sustainable development. The guidelines cover financial, environmental and social dimensions related to operations, and they are the leading global initiative in this field. In 2013, GRI published a new version of its guidelines (G4), calling for obligatory implementation as from the 2015 reporting year. For 2014, we are reporting pursuant to an earlier version, GRI G3.1. The transition to G4 means, among other things, that we must carry out a materiality analysis related to sustainability in 2015. In our opinion, our reporting practice is generally compliant with GRI’s reporting principles. GRI version 3.1 uses a classification that indicates the extent to which a company applies GRI’s definitions and disclosure requirements. KONGSBERG complies with the requirements for level B+. The ‘+’ indicates that the report has been independently verified. The answers to the indicators can be found directly in the text. The report’s final pages contain a reference to the individual GRI indicators and where they are discussed in the report. For more details about GRI, see their website at www.globalreporting.org

C C+ B B+ A A+ Obligatory Self-declared Independently verified Optional GRI verified

The Norwegian Accounting Act The Accounting Act requires large enterprises to report on their corporate social responsibility either in the Directors’ Report or in a separate report. The report is to cover consideration for human rights, employee rights and social conditions, the outdoor environment and anti-corruption activities. Special regulations stipulate that reporting pursuant to the UN Global Compact or Global Reporting Initiative (GRI) can supersede the requirement for reporting in the Directors’ Report. It is our assessment that the Sustainability Report for 2014 is fully adequate and compliant with the requirements of the Norwegian Accounting Act.

1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information REPORT SUSTAINABILITY Board treatment The Group’s Sustainability Report has in its entirety been reviewed and approved by Corporate Executive Management and the Board of Directors.

External verification “We will continue to expand our international presence, meaning more focus on corporate social responsibility.” The report has been verified by a third party, the independent auditor Deloitte.

Picture: Follow the Sun - regardless of the time of day, someone at Kongsberg Maritime will be on duty to answer calls for help. Three high-tech support centres in Europe, America and Asia make sure of that. See the Auditor’s Statement on page 148.

104 KONGSBERG • Annual Report and Sustainability Report 2014

KONGSBERG • Annual Report and Sustainability Report 2014 107 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

CEO WALTER QVAM

KONGSBERG celebrated its bicentennial in 2014, marking the start of the next 200 years of our history. In attaining such a milestone, we would like to honour the achievements of generations of co-workers before us at one of the world’s oldest technology enterprises, at the same time as we would like to emphasise the importance of always looking to the future, that is, towards the next 200 years of KONGSBERG’s history. Sustainability and corporate social responsibility will be very central to our further development.

responsibility to continue this unique history, passing on to coming generations a KONGSBERG that is even stronger and better than when we took over. For us, this is what corporate social responsibility is all about.

Stronger international presence We will continue to expand our international presence, meaning more focus on corporate social responsibility, including anti-corruption, labour rights, human rights, climate challenges and the follow up of a responsible and sustainable supply chain.

Value platform The Group’s value platform and the attitudes our values represent are the very essence of KONGSBERG’s work with corporate social responsibility. An organisation characterised by wholesome attitudes promotes behaviour that means more than most regulations and procedures. In an ever more globalised competitive situation, where companies and products alike are becoming increasingly similar, a strong and visible corporate culture is crucial for Operating revenues totalled NOK 16.6 billion in 2014, up 1.8 differentiation, market recognition and good relations with per cent from 2013. KONGSBERG ended the year with an our customers and partners. Value issues are high on the EBITDA margin of 12.4 per cent and a robust backlog of agendas of our leaders and key personnel, and there is orders valued at NOK 21 billion. We have spent an amount genuine follow up of individuals’ behaviour. on product development equivalent to about 10 per cent of our sales. We have also intensified our CSR efforts KONGSBERG’s four values are: throughout the entire Group. Determined, Innovative, Collaborative, Reliable KONGSBERG delivers solutions, products, services and systems to several industries and market segments. This Besides specific activities associated with corporate social has led to financial robustness and a valuable network of responsibility, such as those described in this report, we international customers. The Group also has a strong work systematically to discuss and anchor the importance common core. Our business areas have many common of our value platform in all parts of our organisation. denominators as regards basic technology and expertise, shared fundamental values and common work processes. Most of our business areas are related to the ocean space. Reliable (dependable, trustworthy) We have solutions and systems that can help solve the ”Our customers and partners can count on challenges of both today and tomorrow. We see that our KONGSBERG to deliver – always. Working with opportunities to draw on expertise and technology across KONGSBERG means working with reliable individuals, the Group are growing. a reliable enterprise and reliable products. KONGSBERG is a responsible organisation Corporate social responsibility through 200 years characterised by integrity and with respect for health, 2014 marked a major milestone in KONGSBERG’s history. safety and the environment. We are reliable individuals. Like Norway’s Constitution, we celebrated our bicentennial. We are responsible members of society.” Not many companies can look back on 200 years of continuous operations, and we are both proud and humbled by this fact. We believe that it is our corporate social

108 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

The UN Global Compact Initiative Sustainability and corporate responsibility in KONGSBERG joined the UN Global Compact in 2006. the supplier chain We have learned more about the topics covered by the Our suppliers are important contributors to our value crea- initiative, both through direct contact and through national tion. Our target in this area is to get an overview of the risk and Nordic networks. Each year, we draw up action plans associated with sustainability and corporate responsibility in for corporate social responsibility. The principles in Global the supply chain, and to ensure that the risk is manageable Compact are the guiding principles for our plans. We will through controls and measures. continue to support the important work done in association with the Global Compact. Our employees We have decided to make our employees, health and safety Sustainable innovation an area of focus in this year’s report. This is invariably one Our ability to think new and innovate is essential if we are of the areas that attracts the most attention, and we wish to continue this good corporate trend in the years ahead. to render it visible in the context of sustainability and As a technology enterprise, our most important contribution corporate social responsibility. to solving the climate challenge and resource situation is to use our knowledge to develop products that can help Charge, corruption case in Romania address these challenges. This year’s report discusses six In February 2014, charges were filed against Kongsberg examples of products we would describe as products of Gruppen ASA and Kongsberg Defence & Aerospace AS and sustainable innovation. an employee, alleging serious corruption in conjunction with deliveries of communications equipment to Romania Areas of focus 2014 between 2003 and 2008. In 2014, KONGSBERG elected to focus on the following KONGSBERG is cooperating with the National Authority aspects of corporate social responsibility (see the detailed for Investigation and Prosecution of Economic and Environ- discussion on pages 123–130): mental Crime in Norway to determine what actually happened, but it is expected that it will take time before the Policy for Sustainability and Corporate Social Responsibility case is closed. Our Policy for Sustainability and Corporate Social Responsi- KONGSBERG has zero tolerance for corruption, and high bility and the principles underlying it are integral parts of the ethical standards are an integral part of our business Group’s strategy and planning work. In this context, we activities. We have spent several years building up and emphasise that all growth and all strategic business-related further developing compliance rules and compliance decisions taken within the Group are to be firmly entrench­ positions at the corporate level and in the business areas. ed in a sustainable perspective. Today’s anti-corruption system is considered to maintain a good international calibre, and independent parties have Anti-corruption assessed it constituting a comprehensive, robust system. KONGSBERG takes the prevention of corruption very seriously. KONGSBERG has zero tolerance for corruption Targets for 2015 among our employees, consultants and business associates. In 2015, we will prepare a new strategy for climate and the As an enterprise with significant international activities, environment. One very central aspect of this strategy will KONGSBERG has implemented a comprehensive anti-­ be the utilisation of our unique technological expertise to corruption programme, and high ethical standards are an develop products that will reduce greenhouse gas (GHG) integral part of our business activities. We have worked in emissions. Beyond this, we will generally continue to con- this area systematically for many years, attaching import­ centrate on the same areas of focus we worked on in 2014. ance to compliance, training, education and verification. 2015 will be a year characterised by opportunities and challenges for KONGSBERG. Throughout 2014, the Group Human rights and labour rights further reinforced its market-related, technological and During the year, we drew up routines for better, more financial positions and has the very best point of departure systematic analysis, control, reporting and follow up of for continued satisfactory progress in our main markets. possible violations of the rights. The routines will be We will actively continue our efforts to further develop implemented in 2015. tech­nologies, products and systems that meet the extremely high standards posed by our customers. As an Climate challenge integral part of this work, we will continue our focus on The UN’s Intergovernmental Panel on Climate Change sustainability and corporate social responsibility. (IPCC), fifth report, part 1, emphasises the severity of ongoing climatic change. Although we are a modest player when it comes to GHG emissions, we nonetheless take initiatives to reduce our environmental footprint. We think Walter Qvam, globally, but act locally. Chief Executive Officer

KONGSBERG • Annual Report and Sustainability Report 2014 109 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

THE WORLD OF KONGSBERG Europe

Norway Great Britain

Employees 4,770 (4,741) Employees 272 (268)

Number of suppliers1) 3,117 (3,023) Number of suppliers1) 312 (229)

Added value2) MNOK 9,237 (10,062) Added value2) MNOK 639 (495)

Investments MNOK 164 (254) Investments MNOK 17 (23)

The Group’s head office is located in Kongsberg. Kongsberg Maritime’s head office for offshore activities in Kongsberg Maritime has operations for development, Great Britain is located in Aberdeen, Scotland. We also have production, testing, sales and service in Kongsberg, Horten, smaller offices in Wick, Scotland, and in Waterlooville and Great Ulsteinvik, Sandefjord and Trondheim. Yarmouth, England. Operations here include product develop- Kongsberg Oil & Gas Technologies is located in Asker, ment, production, sales and support. Drammen, Horten, Kristiansand, Stavanger and Bergen. Kongsberg Oil & Gas Technologies has operations for sales Operations here: sales, product development, project deliveries, and project follow-up in Guildford, England and Aberdeen, service and production. Scotland. Kongsberg Defence Systems and Kongsberg Protech Kongsberg Defence Systems, through its subsidiary Systems account for the bulk of our defence activities, and Kongsberg Norcontrol, has a sales and service office in Bristol. most of their operations are in Kongsberg. We also have Kongsberg Protech Systems, through its subsidiary operations in Horten, Asker, Kjeller and Stjørdal. Operations Kongsberg Integrated Tactical Systems, has a sales office in here include development, production, testing, sales and Hereford. service. Kongsberg Spacetec and Kongsberg Satellite Services (50 per cent stake) in Tromsø are both part of Kongsberg Defence Systems. Spacetec is a leading maker of ground stations for data from meteorological and earth observation satellites. Satellite Services has ground stations for download- ing satellite data on Svalbard.

Poland Rest of Europe

Employees 144 (112) Employees 206 (280)

Number of suppliers1) 18 Number of suppliers1) 688 (659)

Added value2) MNOK 81 (61) Added value2) MNOK 711 (656)

Investments MNOK 5 (6) Investments MNOK 5 (3)

Kongsberg Maritime has a company that is engaged in service The Group also has offices for sales, service and project and project support in Szczecin. support in Denmark, Finland, France, Greece, Italy, Ireland, the Kongsberg Defence Systems, through its subsidiary Netherlands, Russia, Spain, Sweden, Germany and Hungary. Kongsberg Defence Sp.Zo.o, has a marketing office in Warsaw.

1. Number of suppliers that invoiced KONGSBERG for more than NOK 50,000 in 2014. Certain suppliers have been counted two or more times if they are suppliers for two or more of our business areas. The figures do not include all suppliers dealt with directly by our international locations. 2. Added value shows the operating revenues generated in the legal units in the individual countries.

110 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Asia

China India Singapore

Employees 683 (578) Employees 223 (235) Employees 213 (204)

Number of suppliers1) 135 (158) Number of suppliers1) 27 (42) Number of suppliers1) 131 (154)

Added value2) MNOK 456 (281) Added value2) MNOK 117 (60) Added value2) MNOK 1,007 (862)

Investments MNOK 20 (3) Investments MNOK 4 (8) Investments MNOK 6 (3)

Kongsberg Maritime has built up Kongsberg Maritime has sales and Kongsberg Maritime in Singapore substantial business activities in service offices, software support and focus mainly on sales, installation, China. The business area operates as development activities in Mumbai. engineering, commissioning and a local supplier to the Chinese shipyard The business has grown in recent service/support. Singapore has one industry, and now has offices in years. Increasing emphasis is being of the world’s largest harbours and is Shanghai, Dalian, Guangzhou and placed on maritime safety and on a substantial shipowning and shipyard Zhenjiang. Our production unit in coastal and harbour vessel traffic nation. Zhenjiang consists of electro-­ monitoring in India. Kongsberg Defence Systems, mechanical lines where we Kongsberg Oil & Gas Technologies through the company Kongsberg manufacture consoles, cabinets and has operations in both Mumbai and Norcontrol IT, makes significant sensing units. We also have a CNC Bangalore. The business in Mumbai deliveries to Singapore’s vessel traffic centre where we make mechanical offers sales support and project monitoring, and is also represented components and do light engineering. support. In Bangalore, the main here. responsibility is software development.

South Korea United Arab Emirates The rest of Asia

Employees 231 (222) Employees 42 (44) Employees 4

Number of suppliers1) 118 (63) Number of suppliers1) 35 Number of suppliers1) 52

Added value2) MNOK 1,814 (1,558) Added value2) MNOK 93 (73) Added value2) MNOK 17 (13)

Investments MNOK 8 (5) Investments MNOK 1 (1) Investments MNOK 0 (0)

Kongsberg Maritime’s main operations Kongsberg Maritime has a service Kongsberg Maritime has set up a sales in South Korea are located in Jungkwan office in Dubai. and service office for fisheries activities outside Busan. The main activities are in Malaysia. sales, engineering, installation, Kongsberg Defence Systems has commissioning and service/support, as operations in the United Arab Emirates, well as local production. For years, we Kuwait and Saudi Arabia. The main have been building up a local presence activities are the operation and delivery based on highly qualified co-workers in of projects involving tactical radio and the world’s largest shipbuilding nation. communications systems. Kongsberg Defence Systems has a Kongsberg Oil & Gas Technologies sales office in Seoul. has a sales and project office in Malaysia.

KONGSBERG • Annual Report and Sustainability Report 2014 111 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

North America

USA Canada

Employees 637 (626) Employees 136 (135)

Number of suppliers1) 515 (705) Number of suppliers1) 134 (195)

Added value2) MNOK 1,863 (1,664) Added value2) MNOK 319 (261)

Investments MNOK 94 (26) Investments MNOK 2 (5)

Kongsberg Maritime has operations in Seattle (Washington), Kongsberg Maritime’s largest maritime operation in Canada Houston (Texas), New Orleans (Louisiana), Pocasset is located in Vancouver. The company there is engaged in (Massachusetts), Salt Lake City (Utah) and West Mystic proprietary product development and production. The business (Connecticut). In Pocasset, operations include development, in Vancouver is based on hydroacoustics technology, and is sales and support for autonomous underwater vehicles (AUV). coordinated with Kongsberg Maritime’s other subsea activities. The other units are mainly engaged in sales and customer The business area also has two sales and customer support support. The unit in Seattle is also engaged in technological locations in Nova Scotia and Newfoundland on the east coast. development and the adaptation of existing products for the Kongsberg Defence Systems is represented by Gallium Visual US market. Systems Inc. in Ottawa. The company is known for its map Kongsberg Oil & Gas Technologies has operations in Houston graphics tool for military command and control systems. (Texas) aimed at sales, support and project implementation. Kongsberg Protech Systems is located in London, Ontario. Kongsberg Defence Systems has a marketing office in The plant was established to maintain and manufacture Alexandria (Virginia). weapons systems for the Canadian market. Kongsberg Protech Systems has a marketing office in Alexandria (Virginia). Johnstown (Pennsylvania) is the site for the production and maintenance of the PROTECTOR weapon control system for the US market. The business area has a project office in Mount Arlington, New Jersey. In Bellport (New York), our subsidiary Kongsberg Integrated Tactical Systems (KITS) develops and manufactures parts and systems for infrastructure for military vehicles.

112 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Central and South America and Antarctica

Brazil Mexico

Employees 121 (118) Employees 13 (11)

Number of suppliers1) 119 (33) Number of suppliers1) 9 (3)

Added value2) MNOK 176 (145) Added value2) MNOK 35 (34)

Investments MNOK 8 (17) Investments MNOK 2 (0)

Kongsberg Maritime’s business in Brazil comprises sales, Kongsberg Maritime has set up a service office in Mexico. service, engineering and the commissioning of systems for the merchant marine and offshore vessels, as well as user training. Business is booming on the oil fields outside Rio de Janeiro. The shipping industry has had formidable growth in tandem with the political and financial development in the country. The Antarctica training centre in Rio de Janeiro offers different training programmes for Brazilian crew members, including simulator practice. The unit also has an anchor-handling simulator. Kongsberg Defence Systems’ jointly- and equally-owned Kongsberg Oil & Gas Technologies has a sales and project subsidiary Kongsberg Satellite Services has a ground station office in Brazil. for satellite data on Antarctica.

KONGSBERG • Annual Report and Sustainability Report 2014 113 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Africa

Algeria Nigeria

Employees 0 (4) Employees 0 (0)

Number of suppliers1) 0 (0) Number of suppliers1) 0 (1)

Added value2) MNOK 0 (0) Added value2) MNOK 0 (0)

Investments MNOK 0 (0) Investments MNOK 0 (0)

Kongsberg Defence Systems has offices for operations and Kongsberg Maritime has a service and support office for projects related to tactical radio and communications systems offshore activities off the coast of Nigeria. in Algiers, Algeria.

Total number of suppliers in Africa: 13

Oceania

Australia

Employees 17 (27)

Number of suppliers1) 16 (69)

Added value2) MNOK 45 (95)

Investments MNOK 1 (0)

Kongsberg Maritime has sales and service operations in Perth. Kongsberg Oil & Gas Technologies has a sales and project office in Perth. Kongsberg Protech Systems has a marketing office in Adelaide.

114 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

ACCOUNTABILITY

KONGSBERG has 200 years of tradition and history as a defence supplier and technology enterprise. Today, we are an important partner for customers in the defence, aerospace, and maritime industries, as well as in oil and gas industry.

The defence industry Norway generally exports to allied forces. In 2013, 88 per The Norwegian Armed Forces performs important tasks cent of Norway’s exports of Category A material and for society in times of peace, crisis, armed conflict and war. 93 per cent of the exports of Category B material went to A modern total defence calls for state-of-the-art defence NATO countries, Finland and Sweden. KONGSBERG has systems, and KONGSBERG’s defence systems and prod- transparent cooperation with the Ministry of Foreign Affairs ucts are an integral part of this. In 2014, defence operations in connection with licence applications and we have a accounted for 33 per cent of our sales. KONGSBERG’s role com­prehensive internal control system for our export as a supplier of defence products must be seen in the op­erations. KONGSBERG has partners, suppliers and context of Norway’s national security policy, and Norway’s customers in many countries. Consequently, we must also international obligations as a member of the UN and NATO. comply with other countries’ export control regulations in The Armed Forces and KONGSBERG cooperate closely to connection with both re-exports from Norway and exports develop tailor-made systems to meet Norway’s particular from the countries in which we operate. needs. KONGSBERG has also developed high-technology defence systems that are important in an international Oil, gas and the merchant marine context. Our deliveries are subject to strict export rules. More than half of our Group is involved in the oil, gas and We are acutely aware of the special responsibility that rests shipping industries, all of which face challenges related to on us as a defence supplier. greenhouse gas emissions. The global demand for energy and the need for transportation are growing, and even The export of defence materiel though alternative energy carriers are rapidly moving into Norway’s rules for the export of defence materiel are the market, oil and gas will continue to be the most among the most stringent in the world. The Norwegian important energy carriers for many years. KONGSBERG’s parliament has resolved that defence products can only be systems and products are largely related to optimisation, sold to pre-approved countries. Transparency in respect of safety, the operation and control of machinery, production the export of defence materiel is an important principle in processes and equipment. We supply systems and services Norway. We consistently comply with the requirements that facilitate the effective use of resources, more efficient posed by the Ministry of Foreign Affairs for the application sailing routes and safer operation of complex vessels and process, reporting and statistics. installations. Thus, we help make improvements in industries Export control implies that defence materiel, technology that will play a crucial part in future global development. and services can only be exported with an export licence issued by the Ministry of Foreign Affairs. There are two reasons for controlling exports: 1. to ensure that the export of defence materiel from Norway takes place in compliance with Norwegian security and defence policy. 2. to ensure that the export of multi-purpose products does not contribute to the proliferation of weapons of mass destruction (nuclear, chemical and biological weapons).

What types of defence products does KONGSBERG sell? Category A materiel consists of weapons and ammunition. KONGSBERG does not manufacture the types of weapons Category B materiel comprises other military materiel. that are blacklisted by some ethical funds, e.g. cluster bombs, Multi-purpose products are civilian products, technology and land mines, nuclear weapon, biological weapons or small services with potential military applications. firearms. Most of our defence businesses supply missiles, and systems for weapon command and control, decision-support and communications.

KONGSBERG • Annual Report and Sustainability Report 2014 115 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

ENCOURAGING CHILDREN AND YOUNG PEOPLE TO LEARN MORE ABOUT MATHS AND SCIENCE

At KONGSBERG, we believe that science is the key to solving the challenges of the future. Consequently, we would like to motivate children and young people to discover how useful physics, mathematics and science really are.

An interest in science usually starts already in early child- A special guild certificate in the subject of polymer com­ hood. For that reason, we support the Kongsberg Science posites has been established at the composite plant in Centre, which is open free of charge to day-care centres Kongsberg. and schools. Here, children are introduced to science High attrition is one of the challenges facing science sub- through play and experimentation. The offer also includes jects in Norway. In this context, KONGSBERG has voiced upper secondary schools. The Centre has course modules its support for a national technology campaign to streng­ in subjects such as energy, mechanics, mathematics, then the sciences and help retain engineering students. technology and animation. Our summer programme is part of this initiative. Each year, KONGSBERG cooperates with a number of lower and KONGSBERG accepts roughly 150 students who work on upper secondary schools, inviting school classes to tour our projects throughout the entire corporation. facilities and accepting pupils for short-term placements. The summer jobs are an important aspect of We also have employees whose work is to plan programmes KONGSBERG’s corporate social responsibility, at the same for elementary school and secondary schools. time as they are good for recruitment and for product KONGSBERG cooperates with a number of university development. We would like to help ensure that more colleges and universities in Norway. We take part in career engineering students have a chance to gain practical experi- days, give presentations, invite students to visit us, sponsor ence. For many, a summer job is the first step on the path professorships, and cooperate on selected projects with to getting a permanent job at KONGSBERG. students who would like to write their theses in collabora- Another important policy instrument in the national tion with us. campaign to promote technology is the student competition Along with other companies in Kongsberg, Buskerud/ “Your Extreme”. In collaboration with the Norwegian Vestfold University College and the Norwegian Centre of University of Science and Technology, KONGSBERG invites Expertise, the Group has developed a master’s degree students to submit technological solutions to the challenges programme in Systems Engineering. Under this programme, of tomorrow. This initiative is intended to motivate first- and students hold paid part-time positions at one of the enter- second-year students to finish their first two years, as the prises. In cooperation with other companies in Kongsberg, average attrition rate is high during that period. we also offer a unique training programme for apprentices.

Left: Kongsberg Science Centre

Right: The Norwegian University of Science and Technology

116 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

CONTRIBUTIONS TO SPORTS, CULTURE AND SOCIAL CAUSES

KONGSBERG contributes to value creation and economic development in local communities in which we operate. The Group is an integral part of these communities. This is because we take a genuine interest in our employees, and in supporting sports, culture and social causes. Here are a few examples:

Children and young people India Zambia and the Philippines In India, we support AARAMBH, a charity that works in For many years, KONGSBERG has provided support to Navi Mumbai. The organisation is a service centre for SOS Children’s Villages in Zambia and on the Philippines. the most disadvantaged families in the city’s slums. SOS Children’s Villages give the most vulnerable children a In Bangalore, we sponsor an English teacher at the school family and a safe and secure home, and help them shape Kanaka Vidya Mandir, and we help provide school uniforms their future by taking part in the development of their local and supplies for the pupils. communities. Norway Brazil In Norway, we have concentrated our support on teams We provide support to the Bola pra Frente Institute, which and associations in the local communities in which we are offers poor children schooling and football training. The represented. Priority is given to sports and culture. institute was founded in 2000 and since then, it has helped hundreds of children and young people to a better life. We are also part of the project “Dream Learn Work” that offers children from poor areas training and education that can help qualify them to work in the companies that take part in the project. Additionally, support is given to the social project Karanba in Rio de Janeiro. Using football (soccer) as a tool, the project helps disadvantaged children from the slums with education, development and advancement. Today, Karanba organises about 1,000 children and adolescents, boys and girls alike, from several different parts of Rio de Janeiro.

Left: The Norwegian University of Science and Technology

Right: The Gloger Festival 2014

KONGSBERG • Annual Report and Sustainability Report 2014 117 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

SUSTAINABLE INNOVATION

Environmental monitoring • Green shipping • Subsea Storage Units • Maritime simulators • Wind power

118 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

SUSTAINABLE INNOVATION

KONGSBERG’s 200-year history is a story of innovation and growth. It is an industrial fairy tale, borne of the legacy of Kongsberg Våpenfabrikk in areas as diverse as subsea technology, automation, jet engines and technology relating to the defence, maritime and offshore markets. However, the story has only just begun.

There are tremendous business opportunities located in Against this backdrop, corporate executive management the interface between KONGSBERG’s expertise and the has defined two main areas with substantial potential for emerging ‘green market’. We see similar chances unfolding sustainable growth: ‘Ocean Space’ and ‘Smart Communi- all across our global organisation. There is formidable ties’. Focus and energy will have to be devoted to these potential inherent in applying our overall resources better, specific growth areas, giving rise to a broad range of which could also generate considerable added value both in opportunities based on KONGSBERG’s expertise. and between established business areas and as we explore In a world with ever more focus on finite vital resources, new markets. our solutions must seek to minimise the consumption of We have set ambitious growth targets for the years resources while enabling our customers to reduce their ahead. Large parts of our growth will have to originate global footprint. A sustainable approach is therefore a outside the framework of the individual business areas’ prerequisite when seeking innovative solutions to the plans and acquisitions. challenges we face, whether they are externally defined or To achieve the ambitions for growth that have been set, arise as part of our in-house activities. KONGSBERG will have to reach a new level of innovation within, between and outside our existing business areas.

KONGSBERG • Annual Report and Sustainability Report 2014 119 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

ENVIRONMENTAL MONITORING Building the ocean observatories of the future

Kongsberg Maritime is building two ocean observatories to be placed off the coast of Svalbard (Spitsbergen) to monitor methane emissions from the seabed. Our customer is the Centre for Arctic Gas Hydrate, Environment and Climate (CAGE) at the University of Tromsø. This is the first time that research will be done on the full cycle of methane emissions, from the seabed to the atmosphere. These emissions require cutting-edge technical expertise in order to be measured. The observatories will include multiple instruments, be self-­sufficient and have wireless networks so that they can regularly transmit data to scientists. The instruments will monitor

methane emissions, CO2 in the water column and the acidification of ocean waters. The data In recent years, KONGSBERG has been sensor arrays. The observatories destined for from the observatories will contribute important engaged in several major research and develop- CAGE are a good fit with KONGSBERG’s list of information to understanding processes related ment programmes, including environmental merits as a practical developer of environmental to climatic change. monitoring and the development of subsea monitoring.

ENVIRONMENTAL MONITORING Surveilling the High North

In 2014, KONGSBERG concluded a contract station services for Sentinel satellites under the to relevant European organisations. The first with the European Space Agency (ESA). The ESA’s Copernicus programme. radar satellite, Sentinel 1a, is especially impor- agreement entails that Kongsberg Satellite KSAT will be responsible for downloading and tant for Norway since it is used, among other Services (KSAT) will be supplying ground transmitting data from the six Sentinel satellites things, for marine surveillance in the High North. Data from this satellite is used in operational services, e.g. for oil spills, ice and ship detection. It offers an effective way for Norway to monitor the High North. The services KONGSBERG will be supplying from its station on Svalbard will enhance the company’s position as a supplier of services related to data reception and the management of satellites in polar orbit.

120 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

GREEN SHIPPING Hybrid solution for the maritime industry

Kongsberg Maritime is now focusing on new power for a limited time. For example, dynamic It is assumed that the market for such systems solutions in response to the need for positioning requires several large diesel will grow rapidly in future, and hybrid solutions environment-friendly operations of merchant generators that run inefficiently with a very light represent a deliberate choice of direction on the and offshore vessels. In December 2014, load most of the time. If a battery could offset part of Kongsberg Maritime. Kongsberg Maritime became part owner of peak loads, fewer diesel generators would be Grenland Energy, a company that develops needed to run efficiently. battery systems for the maritime and offshore industry. Kongsberg Maritime thereby acquired expertise to help develop hybrid solutions, that is, systems that use several energy sources. Grenland Energy manufactures batteries that can yield a high electrical output for shorter periods of time. They are intended to be used to meet peak needs for output and to store energy during periods with less demand for power. Thus, the batteries facilitate more optimal operation and reduce fuel consumption, which cuts costs and is environment friendly. A large number of applications on offshore installations and vessels require a great deal of

SUBSEA STORAGE UNITS Reducing the need for energy

A Subsea Storage Unit is a concept that vessels anchored beside offshore oil installa- A Subsea Storage Unit is made of a flexible bag KONGSBERG has developed for storing oil on tions. This leads to emissions of GHGs from enveloped in a protective shell that can contain the seabed. Oil is traditionally stored on board vessels, and requires personnel and helicopter the entire volume of the oil if the flexible bag transport. were to leak. Sensors will detect any leaks dur- ing filling and emptying. This makes the solu­tion at least as safe as a conventional double-hulled vessel. The concept is based on using a flexible bag. This material is nothing new. For example, it is used to store fuel for military purposes. From this perspective, using a bag on the seabed is a new application, but it is no more complicated than storing fuel. Each bag holds up to 25,000 cubic metres of oil, and up to six storage units can be linked together.

Scale-model SSU. (Scale 1:10)

KONGSBERG • Annual Report and Sustainability Report 2014 121 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

MARITIME SIMULATORS The most amazing simulator technology

training could be done on it. The simulator allows the crew to test their skills in situations that cannot be tested at sea, e.g. a vessel may suddenly appear in front of the bow, a GPS failure, a defective gyro or a variety of other things the crew needs to practice. The simulator is nearly identical to the bridge on a real Skjold class coastal corvette. All the instruments and communications equipment are authentic. A deep bass speaker under the floor simulates the vessel’s four gas turbine engines. Advanced software allows the Navy to very accurately replicate the vessel’s complex move- ments in the sea. The new simulator also offers many financial The Norwegian Navy’s new Skjold simulator is decision-making and routines. The original plan advantages. Officers can practice navigation profoundly important for educating officers on was to train roughly 2/3 of the time on the and tactical manoeuvring without polluting, board Norway’s new coastal corvettes. vessel and 1/3 on the simulator. Once the simu- spending large sums of money, occupying an The naval officers can use the simulator to lator was in place, the training turned out to be entire crew or inflicting wear and tear on the fine hone their skills in navigation, manoeuvring, so realistic that the bulk of the navigation vessels.

WIND POWER Launching new windmill technology

KONGSBERG plans to launch its Wind Manage- advanced analyses of operating parameters in ment System in 2015. The system is intended to the wind parks. reduce costs related to wind power by up to At the same time, KONGSBERG has set up eight per cent. a new company called Kongsberg Renewables The Wind Management System detects each Technology. This represents a further fine individual windmill’s status, condition and main- hon­ing of KONGSBERG’s ambitions in the tenance requirements. The system integrates all renewable segment. The focus on renewable the requisite parameters to enhance wind park energy also signals that KONGSBERG has operations by optimising energy production and ambi­tions for developing other renewable minimising wear and tear on the equipment. energy sources, such as solar power and hydro­ The system combines several internal and power. external sources, as well as statistics and history to provide better weather forecasts for each wind park. This makes it easier to predict how much energy the wind park can generate at any given time. KONGSBERG tested the system with good results in 2014. A testing centre has been set up in Trondheim to acquire data from two different wind parks. The data make it possible to make

122 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

WHAT HAVE WE ACHIEVED?

Policy for Sustainability and Corporate Social Responsibility • Anti-corruption • Human rights and labour rights • Climate challenges • Sustainability and Corporate Social Responsibility in the supply chain • Our employees

KONGSBERG • Annual Report and Sustainability Report 2014 123 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

AREA OF FOCUS 2014–2015 Policy for Sustainability and Corporate Social Responsibility

The Group’s Policy for Sustainability and Corporate Social Responsibility is generally based on a perspective that incorporates opportunities and risks, and where global megatrends are important strategic drivers.

Our Technological innovation is a key element for resolving the serious global challenges facing the earth. position For KONGSBERG, this may offer business opportunities in several markets, seen in the light of our broad technology base and competency platform.

Our The Group’s work with sustainability and corporate social responsibility is an integral part of its other strategic challenges processes. The work is based on the challenges facing the Earth with a view to climate changes and shortages of important resources such as energy, as well as food, access to clean water and minerals. In addition, there are issues related to urbanisation, the loss of biological diversity, etc.

The perspective of opportunity – The anticipated challenges of the future will call for the use of advanced technology. In the course of our work with innovation and the further development of our technologies, the opportunities this will open up will be important drivers.

The perspective of risk – The anticipated development will also present challenges for our own operations. We try to stay ahead of this through energy conservation and other specific measures. In addition, our ‘licence to operate’, i.e. the right to conduct our business relative to the traditional themes in corporate social responsibility, constitutes an ongoing risk that is taken into consideration in our strategic planning.

What have The perspective of opportunity – In 2014, the Group defined two main segments where we envisage formidable we achieved? growth opportunities within the area of sustainable product development: We have called them ‘Ocean Space’ and ‘Smart Communities’.

The perspective of risk – In 2014, we began to assess the global megatrends against our own operations from the perspective of risk. This work will continue in 2015.

Our Our policy identifies the direction for the perspective of opportunity and the perspective of risk. Our ambitions ambitions include exploiting our technological expertise in a rapidly growing “green” market, and we will act in a socially responsible manner. Risk and opportunities related to global megatrends will be analysed and taken into account in our strategic decisions. This will be a continuous process in the years ahead. For the full text of the Group’s Policy for Sustainability and Corporate Social Responsibility, see www.kongsberg.com

124 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

AREA OF FOCUS 2014–2015 Anti-corruption

“KONGSBERG takes the prevention of corruption very seriously. We have zero tolerance for corruption among our employees, consultants and business associates. As an enterprise with substantial international activities, KONGSBERG has implemented a comprehensive anti-­ corruption programme, and high ethical standards are an integral part of our business activities.” Walter Qvam, Chief Executive Officer

Our KONGSBERG has zero tolerance for corruption. Our attitude is expressed clearly through the corporate position Code of Ethics that we adopted in 2003, our endorsement of the UN Global Compact, the OECD’s Guidelines for Multinational Enterprises and our membership of Transparency International. The Board and executive manage- ment devote considerable attention to this work.

Our KONGSBERG operates in both the defence industry and the oil and gas industry, which, according to Transpar- challenges ency International, are two of the sectors most susceptible to corruption. Our activities involve the use of agents and market representatives. The use of third parties is generally known to imply a high risk of corruption, so we pay special attention to that part of our anti-corruption programme. We have developed in-house regulations for signing and following up agreements with market representatives. The regulations include assessments of a mar- ket representative’s ethical standards and reputation. Further, risk is assessed based on the industry, country and company, and approval procedures have been introduced for the use of standard terms of business and the verifi- cation of payments, as well as for follow up during the agreement period, including training and possible audits.

What have We have focused in particular on anti-corruption rules related to gifts and representation, sponsorship, the signing we achieved? and follow up of agreements with market representatives (agents) and supplier conduct. In recent years, we have further developed the Group’s compliance system, placing considerable emphasis on compliance being a line responsibility and part of day-to-day operations. Training and notification routines are important measures. In addi- tion, we regularly perform in-house inspections to ensure compliance with our Code of Ethics in connection with the use of market representatives, including verification of payments. Anti-corruption is an area in which we main- tain continuous focus on prevention, risk mitigation measures and the identification of possible non-compliance. In 2014, we evaluated our anti-corruption programme with the assistance of an independent law firm. The evaluation showed that our programme is satisfactory in the light of internationally recognised laws and parameters. Compared with similar Norwegian companies of the same size and level of international activities, our programme is considered to be among the best. Some areas were identified where there was room for improving our programme and appropriate initiatives were implemented.

Our We base our efforts on systematic risk assessments, internal controls and reporting. We will continue to develop ambitions our training programme, revise our corporate Code of Ethics, and further develop in-house guidelines for due diligence in connection with our business partners.

The charge of corruption in Romania KONGSBERG takes the prevention of corruption very seriously. The activity at issue in Romania was concluded in 2008. We work systematically and continuously to further develop our anti-corruption programme. Rules, routines and practices have been implemented to detect any activities that may signal corruption. Our anti-corruption guide can be downloaded at www.kongsberg.com.

KONGSBERG • Annual Report and Sustainability Report 2014 125 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

AREA OF FOCUS 2014–2015 Human Rights and Labour Rights

The Group’s international activities make us susceptible to problems related to human rights and labour rights, either directly through our own businesses or indirectly through our value chain.

Our KONGSBERG supports and respects the international human rights and labour rights enshrined in the UN’s position Universal Declaration of Human Rights, the UN Convention on the Rights of the Child, the ILO conventions (International Labour Organization) and the UN Global Compact Initiative. Respect and continuous improvement are significant elements of our approach to human rights and labour rights.

Our Through the establishment of new ventures and the use of suppliers outside Norway, KONGSBERG’s level of challenges internationalisation is growing year by year. This means that we must also devote more attention to and learn more about dealing with human rights and labour rights.

What have During the year, we have developed governance documents based on the ‘UN Guiding Principles on Business we achieved? and Human Rights’. Against this background, a course was held on human rights and labour rights for about 60 individuals, including many senior executives. We also conducted an audit related to corporate social responsibility at our units in India. Compliance with human rights and labour rights was part of the audit. No non-compliance of significance was found in relation to these topics.

Discrimination – In 2014, one alert was received claiming harassment, among other things. The case was dealt with pursuant to KONGSBERG’s Code of Ethics.

Child labour and compulsory labour – The Group’s own activities are of such a nature that issues related to child labour and forced and compulsory labour are considered to be of limited relevance. We are working to survey the situation in the value chain. There have been no reports of cases involving these topics.

The use of security personnel at the international level – We use security personnel in the areas in which we consider it necessary. Thus far, the scope of this has been very limited.

Indigenous rights – The Group has not been involved in any violations of indigenous rights.

Suppliers – The follow up of human rights and labour rights in the supplier chain follows current in-house procedures. Self-declarations and audits are important tools in these efforts.

Our We will comply with international standards for human rights and labour rights as expressed in our corporate ambitions Code of Ethics and our Policy for Sustainability and Corporate Social Responsibility. In 2015, for the first time, we will carry out a systematic evaluation of our own activities related to human rights and labour rights. This is in accordance with the recommendations in the ‘UN Guiding Principles on Business and Human Rights’.

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AREA OF FOCUS 2014–2015 Climate challenges

Global warming is one of the most serious threats facing the Earth. According to the UN’s Inter-governmental Panel on Climate Change (IPCC), the average temperature may rise more than four degrees by 2100 if emissions continue at the same rate. The IPCC’s 5th major assessment report published in 2014 paints a dismal picture. However, the report points out that there is still time to avoid the most extreme effects, but we must act quickly.

Our KONGSBERG is an enterprise with moderate GHG emissions, but we must still do our part to ensure the position necessary reduction. Our absolutely largest contribution, notwithstanding, will be the development of sustainable solutions, systems and products that enable our customers to cut their emissions. This will also entail significant business opportunities for us.

Our The climate accounts indicate that our emissions of CO2 are growing year by year. More than 50 per cent of these challenges emissions are related to air travel. Travel is an important part of the Group’s operations and we face a challenge with a view to reducing this type of emissions. Our targets for reducing emissions are relative, so that as we grow, actual emissions may increase even though we reach our targets for relative reductions in emissions. This is a dilemma, given that the global challenge is to cut GHG emissions.

What have The Group has several product areas that have had positive environmental impacts in a variety of ways. we achieved? Moreover, two new main segments have been defined for innovation that offers a substantial potential for sustainable growth. See the discussion in the chapter entitled ‘Sustainable Innovation’.

Our KONGSBERG shall reach its long-term business targets while contributing as little as possible to global warming. ambitions We will accomplish this by: • Finding product solutions that can reduce our customers’ greenhouse gas emissions • Reducing direct and indirect greenhouse gas emissions from own operations • Using environmental profiling as one of several assessment criteria when choosing suppliers We will work systematically to reduce energy consumption and GHG emissions, with special focus on products, infrastructure and transportation. We will be drawing up a new strategy for climate and the environment in 2015.

KONGSBERG • Annual Report and Sustainability Report 2014 127 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

AREA OF FOCUS 2014–2015 Sustainability and corporate social responsibility in the supplier chain

Sustainability and corporate social responsibility in the supply chain is a question of suppliers’ relationship to ethical guidelines, human rights, labour rights, anti-corruption, the climate and the environment. We are of the opinion that systematic, good work with corporate social responsibility is a moral imperative. At the same time, such work reduces our risk and improves the quality of the products we buy.

Our KONGSBERG uses roughly 5,500 suppliers the world over, 3,000 of which are in Norway. This means we help to position safeguard jobs and build competence, not only where we have proprietary operations, but also to a large extent, where we have subcontractors. The suppliers are an important part of our value creation, at the same time as we are important and in many cases decisive for their value creation. This implies an obligation. Basically, we take responsibility for ensuring that the whole value chain linked to the Group’s products complies with our standards for sustainability and corporate social responsibility.

Our There is still work to be done before we have a satisfactory overview of the assessed risk in the supplier chain. challenges This work is time-consuming, and we devote considerable attention to it.

What have We have drawn up principles and systems of governance for how we would like our suppliers to deal with we achieved? sustainability and corporate social responsibility, and how we will follow this up. In 2014, we continued training programmes for auditors from previous years. In addition, we conducted a comprehensive training programme related to directives and the use of computer tools for following up the supplier chain for large parts of our international maritime operations.

Our One main principle is that we will collaborate with suppliers to seek continuous improvement. The goal is to ensure ambitions that elements that fail to meet the standards to which we aspire will be adapted and improved through dialogue. Further, we must ensure that we maintain close control of risk. We also aspire to collaborate with other companies to enhance expertise and the quality of the work and to make operations as rational and efficient as possible.

Conflict minerals are minerals extracted from conflict zones and sold by countries in conflict. The mineral are generally sold to perpetuate armed conflicts, oppression and violence perpetrated on the local population. This is a particular problem in the Democratic Republic of Congo and the adjacent countries (Angola, Burundi, the Central African Republic, Rwanda, South Sudan, Tanzania, Uganda and Zambia). The most important conflict minerals are coltan, gold, cassiterite and tungsten (wolframite). As a result of the Dodd Frank Act adopted in the USA in 2010, and the OECD guidelines, companies are expected to be able to report which ‘conflict minerals’, if any, are used in their products, in which products, where the minerals originated and in which part of the value chain the minerals are introduced. KONGSBERG has drawn up routines for dealing with the expectations described above.

128 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

AREA OF FOCUS 2014–2015 Our employees

KONGSBERG exists thanks to the knowledge and expertise of our employees. Accordingly, we work systematically to make KONGSBERG an exciting, attractive and stimulating place of work. It is important for us to attract appropriate expertise and to ensure that we continuously help our employees to develop.

Leadership at Leadership at KONGSBERG is all about creating value. The key to success is the combination of good leadership KONGSBERG and dedicated co-workers. Leadership is based on our values, code of ethics and leadership principles. Leadership@KONGSBERG is our leadership platform. It is based on leadership development, talent manage- ment and management by objectives. This platform encompasses all the Group’s managers and ensures a uniform process for the follow-up and development of leaders. Our leaders have clear goals and have reconciled those goals with their immediate superiors, including a review of the superiors. We have a good selection of in-house and independent management development programmes. Our leadership platform also includes structured processes for following up planning and talent development. Leadership@KONGSBERG is intended to contribute to creating a continuous inflow of management talent. KONGSBERG has a global HR policy that is one of our governance documents for human resource manage- ment the world over.

Recruitment One prerequisite for achieving the Group’s growth targets is our ability to attract and retain highly qualified and develop­- co-workers. Accordingly, we endeavour to strengthen our position in the labour market and to be at the forefront ment of the competition for the best and the brightest. Each individual business hires people locally with the assistance of local managers. Outside Norway, we usually hire local employees except in certain managerial positions and positions that require special expertise. The Group offers an extensive range of further and continuing education through a combination of in-house and independent programmes and courses. They include professional and personal development, and leadership development. Our employees’ career paths should be open to lateral as well as vertical movement throughout the Group.

Employee We believe in involving our employees and their union representatives in the development of the company. relations KONGSBERG recognises employees’ freedom of assembly and right to engage in collective bargaining in accordance with the ILO conventions. Where this conflicts with local legislation, local legislation shall have precedence. Where legislation prohibits the right to organise, efforts will be made to apply alternative means of ensuring a good dialogue between management and employees. Every second year, a global job satisfaction survey is conducted to provide feedback on how employees experience working conditions and the working environment.

Diversity In tandem with growing internationalisation and a global business model, we strive to make KONGSBERG a robust, widely diverse organisation. Our 7,700 employees the world over reflect great diversity and that is important for protecting our market position. We work towards this end in a systematic, goal-oriented manner by recruiting, developing and retaining men and women of various nationalities and all age groups in all types of positions. One of our goals is to recruit more women into managerial positions. This is done inter alia by focusing on female talents in our leadership development programmes.

KONGSBERG • Annual Report and Sustainability Report 2014 129 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Health and Through our global HR policy, we require that all companies work systematically with HSE to ensure a good safety working environment, prevent injuries and accidents, and to reduce absence due to illness. HSE work is organised through formal bodies made up of representatives of management and the employees. Each business area, as well as the Group’s other entities, has a cooperation structure to deal with legislative and regulatory requirements, as well as with operational needs. We have well-developed HSE routines in our Norwegian operations. All employees in Norway have access to company health services. This varies in accordance with local practices and legislation for our foreign businesses. In Norway, the formal bodies are the works council, joint consultative committees, divisional committees and working environment committees. In addition, ad hoc committees are created for special projects. Both management and the employees are represented on these committees. Our international HSE work is based on our global HR policy, and on applicable legislation and regulations in the country in question. Most countries require that a designated HSE manager be assigned responsibility for ensuring compliance with local and national legislation and regulations. KONGSBERG adapts to countries’ national public health services and supplements them through special agreements as needed. Employees stationed abroad, their families and travelling personnel are given special attention by the company health service, and offered seminars on the cultural differences. They are also covered by more comprehensive insurance schemes. KONGSBERG does not currently have permanent employees stationed in countries that require special safety measures for employees and their families. In connection with new ventures and the build-up of operations in Nigeria, for example, the necessary security measures are taken. The Group has designated fora that determine how employees can travel as safely as possible all over the world. Travel may not be advised or even be prohibited for political, financial, environmental, safety-related or health-related reasons. We also have routines for how employees should conduct themselves on business trips. HSE data is collected from all companies in the Group and reported to Corporate Executive Management and then the Board of Directors on a quarterly basis. The data are also reported to the appropriate authorities in compliance with statutory requirements in different countries.

Absence due Systematic efforts are made to follow up absence due to illness. We see that a good working environment, to illness interesting work and good career development opportunities have a positive impact on absence due to illness. See the details on page 141.

Injuries Injuries and near-accidents are registered in the individual unit and reported to the Group each quarter. See the details on page 141.

Wages KONGSBERG will reward its employees on the basis of results achieved and desirable conduct. We will be competitive but not a wage leader. Starting salaries will reflect this. With the exception of special positions, all employees in Norway are directly or indirectly covered by collective wage agreements. Wages are adapted to local market conditions in the areas in which we operate.

Retirement age Retirement age for employees in Norway is 67.

Left: From Zhenjang

Right: From Rio de Janeiro

130 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

SYSTEMS OF GOVERNANCE AND KEY FIGURES

Our corporate Code of Ethics • Organisation and systems of governance • Responsible taxation • Climate and environmental accounts 2014 • Targets and activities for sustainability and corporate social responsibility • Key sustainability figures • External reporting • Global Compact • Global Reporting Initiative Index • Auditor’s Report 2014

KONGSBERG • Annual Report and Sustainability Report 2014 131 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

OUR CORPORATE CODE OF ETHICS

KONGSBERG’s corporate Code of Ethics expresses our basic attitudes and indicate how we ought to show our fundamental respect for and relate to colleagues, customers and society-at-large. This makes up the backbone for how we conduct our operations, and the code applies regardless of where, when and which of our employees is doing business. This is to be communicated to and understood by all employees, thereby contributing to a strong corporate culture that will help prevent mistakes and irregularities from arising. Well-integrated values and the corporate Code of Ethics make up an important element of our risk management.

KONGSBERG’s corporate Code of Ethics applies to the Alerts about circumstances worthy of criticism Group’s directors, management, employees, casual employ- The Group has special routines for notification of any ees, consultants, market representatives (agents), lobbyists breach of the corporate Code of Ethics. Employees have and others who act on behalf of KONGSBERG. Our Code always had the right to issue alerts about circumstances of Ethics emphasises that all employees and the Group’s worthy of criticism, and a duty to do so if there is a question Board of Directors must maintain high ethical standards of a violation of laws, rules or our corporate Code of Ethics. while performing their duties. The Group has developed KONGSBERG will not tolerate that a person who blows the special guidelines for its suppliers. whistle is subject to reprisals/negative reactions. For more details, see www.kongsberg.com. Updating the corporate Code of Ethics The Group has two ombudsmen who can provide advice The corporate Code of Ethics is updated to stay abreast of and receive alerts from employees. Internal and external national and international developments. They were updated questions about ethics, whistleblowing, etc., may be direct- most recently in 2014. ed to the Group’s Compliance Officer by sending an e-mail to: [email protected]. In-house training In 2014, we received and dealt with a total of nine All new employees go through an e-learning programme queries. based on the Group’s Code of Ethics. The programme is There is a web-based alert channel for our employees in updated regularly, and consists of an e-learning course and the USA and Canada. The website is at a classroom course for new employees and line supervisors. https://kongsberg.alertline.com/ In addition, a complex training programme has been further developed for the field of ethics, business-related behaviour Sanctions and special topics for susceptible target groups. The Group has not been fined or subject to other types of sanctions in 2014 due to anti-competitive business practices or failure to comply with legislation or regulations.

132 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

ORGANISATION AND SYSTEMS OF GOVERNANCE

KONGSBERG’s overall system of governance is closely linked to the ‘Norwegian Code of Practice for Corporate Governance’. The following is an overview of systems of governance and organisation linked to sustainability and corporate social responsibility.

The Annual General Meeting is the Group’s supreme governing body. Here, the shareholders can influence how Annual General Meeting (AGM) sustainability and corporate social responsibility are practiced at KONGSBERG.

The corporate Board of Directors bears the ultimate responsibility for KONGSBERG’s ethical behaviour and The Board contribution to sustainable development. The Board adopts the Group’s Code of Ethics and Policy for Sustainability and Corporate Social Responsibility, and the Sustainability Report is reviewed and approved by the Board.

Corporate Executive Management bears the ultimate responsibility for implementing the Group’s strategy, develop- The CEO and ment and routine work. The CEO is responsible for the content of the Group Policy for Sustainability and Corporate Corporate Executive Management Social Responsibility being followed up, complied with and integrated into the Group’s ordinary strategic planning.

Business Conduct Forum for Sustainability and The Business Areas Ethics Council Review Board Corporate Social Responsibility

The business areas are respon­ The Group’s Ethics Council is to KONGSBERG has comprehensive The Forum is a link between the sible for follow up and compliance help raise ethical awareness, guidelines for how we are to business areas, the Corporate with policy, targets and govern- ensuring good behaviour and comport ourselves in business Centre and Executive Manage- ance documents related to KONGSBERG’s good reputation. situations. The guidelines are ment on questions of sustain­ sustainability and corporate social The Ethics Council’s mandate is adopted by the Board, then the ability and corporate social responsibility. The practical to deal with cases of a principle Business Conduct Review Board, responsibility. Its main responsibili- aspects of the work are usually nature and questions about which is the Group’s compliance ty is to help promote, develop and handled by the four business policies and provisions. The forum and bears the main coordinate the Group’s efforts in areas, with support from the composition of the Ethics Council responsibility for ensuring this field. Corporate Centre. is subject to Board approval. compliance. Climate and the Environment The Council is a link between the business areas, the Corporate Centre and Corporate Executive Management in respect of questions about climate and the environment. The main responsi- bility is to help promote, further develop and coordinate the Group’s efforts in this field.

Following up CSR in the Supply Chain The Council is responsible for promoting and further developing the Group’s work with corporate social responsibility in the supply chain, for ensuring coordinated skills upgrading, risk assessment and the coordination of audits.

KONGSBERG • Annual Report and Sustainability Report 2014 133 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

RESPONSIBLE TAXATION

KONGSBERG’s international presence and the development of new markets mean that we must comply with a wide variety of tax legislation in many countries. In our opinion, a responsible approach to taxation is decisive for the long-term sustainability of our activities in the countries in which we operate.

This includes identifying and complying with current tax At the same time, KONGSBERG has a responsibility to legislation, disclosing all the necessary information to the its owners to optimise and manage the tax expenses. Tax relevant authorities, and taking prudent tax positions where legislation may often be worded to stimulate a certain type tax legislation allows different interpretations or choices. of behaviour, e.g. to promote certain investments or create The commercial aspects of KONGSBERG’s business local jobs. In such situations, KONGSBERG can take activities are paramount, and all tax planning should be advantage of the opportunities afforded by the rules to done with this in mind. A transaction shall only be made reduce its tax expenses. if it satisfies the requirements for form as well as content KONGSBERG takes a transparent approach to taxation pursuant to the tax legislation of the countries in question. and our tax positions. Tax reporting complies with applic­ KONGSBERG employs no “artificial” structures in tax able local tax legislation, as well as with current reporting havens to avoid paying tax. requirements and accounting standards such as IFRS.

134 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

CLIMATE AND ENVIRONMENTAL ACCOUNTS 2014

The Environmental Accounts give an overview of KONGSBERG’s consumption of energy and

water, CO2 emissions and production of waste. It encompasses all Norwegian units, all production units and major offices abroad.

The accounts for 2014 reflect minor changes relative to

2013 in respect of energy use and waste. CO2 emissions for 2014 increased slightly relative to 2013. Registered water consumption increased substantially, due to better reporting. Three new units from Kongsberg Maritime (KM Middle East, KM Holland and Simrad Sl, Spain) are included in the

reporting for 2014.

73.9%Fjernvarme Energy consumption -3.6% fromElektrisitet 2013

123.7

Kongsberg Gruppen 2014 GWh Olje og gass 4.5% Varmegjenvinning -2.6% from 2013 +21.1% from 2013 20.8% 0.8% -3.6% from 2013 +5.9% from 2013

Total energy consumption

150 123.7 GWh 150 Oil & gas 150Heat recovery 150District heating 150 Electricity

120 120 120 120 (external) 120 91.43 GWh

90 90 90 90 GWh 90

7

2 60 60 60 25.71 GWh 60 1 60 30 30 5.57 GWh 30 30 1.02 GWh 30

0 0 0 0 0 2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014

KONGSBERG uses energy in the form of electricity, district heating, and remote cooling are produced from electricity, fuel oil, gas and gas and fuel oil. Kongsberg Technology Park makes district heating heat recovery. Efficient technology allows us some 25 GWh in and remote cooling, gas and compressed air for enterprises located savings each year thanks to the heat recovery plant at Kongsberg in the technology parks in Kongsberg. About half the production is Technology Park. supplied to other enterprises in the technology park. District heating

Figures: Total energy consumption (GWh) for KONGSBERG. District heating produced at Kongsberg Technology Park is included in the figures for electricity, and oil and gas, as well as heat recovery. District heating (external) refers to district heating delivered to KONGSBERG from external suppliers.

KONGSBERG • Annual Report and Sustainability Report 2014 135 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

57.2% GWh

CO emissions 1 2 2 26,006 +4.8% from 2013 Kongsberg Gruppen 2014 7 metric 3.6% tonnes -20.2% from 2013 +2.8% from 2013 39.2%

Flyreiser +2.7%Indirekte Direkte from 2013

Total CO2 emissions

Direct emissions Indirect emissions Flights 30000 26,006 metric tonnes 30000 30000 30000 25000 25000 25000 25000 14,880 20000 20000 20000 10,185 20000 metric tonnes 15000 15000 15000 metric tonnes 15000

10000 10000 941 10000 10000

5000 5000 metric tonnes 5000 5000

0 0 0 0 2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014

KONGSBERG’s CO emissions have been calculated as recom- 2 CO2 emissions mended by the ‘Greenhouse Gas Protocol’ published by the World Change, Business Council for Sustainable Development (WBCSD) and World Metric tonnes 1) past year 2014 2013 2012 Resources Institute (WRI). The environmental accounts encompass

the following sources of CO2 emissions: Scope 1 (Direct emissions) -20.2% 941 1 179 1 004 • Direct emissions (Scope 1): Emissions from the use of fuel oil Oil and Gas (Business area) 723 585 512 and gas to heat buildings, as well as from the production of Oil and Gas (Kongsberg district heating at Kongsberg Technology Park. Technology Park) 218 594 492 • Indirect emissions from electricity (Scope 2): Emissions from Scope 2 (Indirect the consumption of electricity or district heating or cooling from emissions) 2.7% 10 185 9 921 8 393

external suppliers. CO2 emission factors used for electricity are Electricity (Business area) 8 071 8 244 7 371 location-­based and pursuant to GHG Protocol Scope 2 Electricity (Kongsberg Guidance*). Technology Park) 1 523 1 486 865 • Emissions from flights (Scope 3): Emissions from national and District heating from international flights booked in Norway and abroad. external supplier 470 191 157 Remote cooling from *) Source: 2014 data from the Department for Environment, Food & Rural Affairs, external supplier 121 UK. http://www.ukconversionfactorscarbonsmart.co.uk/. For Norway, a Scope 3 (Other emissions) 4.8% 14 879 14 194 10 182 location-based factor of 50t CO2/GWh (this emissions factor for Norway has also been used in earlier reporting years). Flights purchased in Norway 11 144 10 588 10 182 Flights purchased abroad 3 735 3 606 Total 2.8% 26 006 25 294 19 579 Emissions of CO2 were up by 2.8 per cent in 2014, compared with 2013. The Group’s growth in recent years through the establishment of many new businesses entails more activity, and not least more

flights. The increase in CO2 emissions is ascribable to a steep increase in the number of flights taken. Emissions from national and international flights booked in Norway have been included since 2010. For flights ordered outside Norway, reporting is not yet complete. Emissions from flights

represented 57 per cent of total CO2 emissions, increasing by nearly 5 per cent in 2014, compared with 2013.

Figures: Emissions of CO2 (metric tonnes) for KONGSBERG. Emissions from the consumption of fossil fuels for the production of district heating delivered by Kongsberg Technology Park are shown as direct emissions. Indirect emissions include the consumption of electricity and district heating or cooling from external suppliers in the business areas, as well as the consumption of electricity for the production of district heating and remote cooling at Kongsberg Technology Park.

136 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Waste 58.6% 1,787 -5% from 2013 Kongsberg Gruppen 2014 metric

tonnes

-8% from 2013 33.8% Farlig

+10% from 2013 Gjenv 7.6% Restavf -52% from 2013

Total amount of waste 1,787 metric tonnes Residual waste Hazardous waste Recycled waste 2000 2000 2000 2000

1600 1600 1600 1,048

1500

1200 604 GWh1200 1200 metric tonnes

1000 12 800 metric tonnes 7 800 136 800

500 metric tonnes 400 400 400

0 0 0 0 2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014

KONGSBERG generates waste from production and from office Maritime accounts for 70 per cent of total waste, and in 2014, activities. Waste volumes are part of KONGSBERG’s in-house it reduced the volume of waste by 9 per cent compared with 2013. environmental reporting. The report covers generated waste broken The volume of hazardous waste was cut by half, compared down by category of waste and waste for recycling divided by with 2013. recycling fractions. The total volume of waste for KONGSBERG was reduced in 2014 by 8 per cent from preceding years. Kongsberg Figures: Total waste production (metric tonnes) at KONGSBERG.

Water Total water consumption 176,743 Kongsberg Gruppen 2014 m3 200000 176,743 m3

150000 +52% from 2013 100000

50000

0 2013 2014

150000

120000

Water is the lifeblood of all life on earth. It is absolutely 90000 For 2014, KONGSBERG has improved its reporting. Forty units decisive for sustaining eco-systems and keeping the earth’s 60000 have reported water use in 2014, compared with 31 in 2013. Total

30000 environment in balance. Meanwhile, access to clean water is reported water use is 176,743 cubicGWh metres water, which is an

0 increase of 52 per cent from 2013. There is still considerable 2 in short supply many places. Getting access to clean water 1 7

is and will increasingly be one of the main challenges facing uncertainty2013 2014 attached to the reports. sustainable value creation. What is more, flooding and droughts are growing global problems. The UN’s World Water Development Report 3 points out that initiatives are needed urgently if we are to avert a global water crisis. Population growth, rising consumption and climate change are three of the main explanations for this serious situation.

KONGSBERG • Annual Report and Sustainability Report 2014 137 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

TARGETS AND ACTIVITIES FOR SUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY (CSR)

The Group attaches great importance to sustainability and CSR, with added attention being paid by executive management and the Board. The activities marked with or continue to be targets, but final implementation is taking some time. Activities with a were completed on schedule. All the activities will continue to be high-priority areas in 2015.

What we said – Activities Targets 2014 What we did – Status Policy Implement activities in conjunction with the • Assess business-related opportunities related • Pointed out strategic main segments for Policy for Sustainability and CSR, including to sustainable product development sustainable product development assessing risks and opportunities related to • Analysis of global megatrends compared with • Started analyses of risks related to global mega­ global megatrends our “license to operate” trends compared with our “license to operate” Anti-corruption Further develop policies and routines • Ongoing activity pursuant to action plans • Our routines for “integrity due diligence” on the use of market representatives have been updated, and we have published an anti-­corruption guide” • External assessment of the anti-corruption • EY (Ernst&Young) evaluated our anti-corruption programme, seen in the light of the charge in programme against Norwegian and international the corruption case in Romania legislation and frameworks in 2014, and found it to be satisfactory

Perform risk analyses, relevant action plans and • Ongoing activity pursuant to plans of action • Adequate action plans carried out both in the audits to mitigate risk business areas and at the corporate level

Further develop and carry out continuous • Ongoing activity pursuant to training • The training programme was carried out both in training programmes the business areas and at the corporate level Routines for sustainability and corporate social responsibility Remaining work associated with drawing up • Implement routines associated with • Routines related to acquisitions have been and implementing routines and human resource acquisitions implemented development in connection with acquisitions, • Compile other routines • The preparation of other routines has been venture creation, product development, new postponed until 2015 buildings, other proprietary activities, etc. Human and labour rights Draw up routines for analysis, control and the • Implement pursuant to action plans • Routines have been drawn up, implemented on reporting of possible abuses of human rights schedule Suppliers Implement routines and processes for following • Ongoing activities in accordance with action • Routines and processes have been incorporated up suppliers with a view to CSR plans by most units – slight delay in implementation

Follow up the implementation of CSR audits and • Ongoing activities in accordance with action • Conducted somewhat more audits than in dialogue with suppliers plans preceding years Climate strategy Follow up specific initiatives • Ongoing activity and start work towards • Project New Climate Strategy defined, new targets kick-off February 2015

Identify new initiatives related to the climate • Work done in 2014 and 2015 • Being done due to the new climate strategy strategy and policy for sustainability and CSR • Better quality reporting • Switched to new reporting tools • Identify significant sources of climate influences • Postponed until 2015 in connection with drawing • Initiate measures to reduce our environmental up the new climate strategy footprint • Many minor initiatives implemented • Start the work to identify our products’ positive • Postponed until 2015 in connection with drawing influences for reducing greenhouse gas emissions up the new climate strategy Stakeholder dialogue Implement systematic dialogue with stakeholders • Greater focus on this work in 2014 • Dialogue meetings held related to CSR

138 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

The targets for 2015 will be in furtherance of the areas of focus we have had in 2014

Activities Targets for 2015 – 1 year Targets for 2017 – 3 years Targets for 2019 – 5 years Policy Follow up the intentions in the Policy for • Continue innovation work related to • Evaluate and further develop • Evaluate and further develop Sustainability and CSR, including assessments the two main strategic areas for innovation work related to of risk and opportunities related to global sustainable product development “the green revolution” megatrends • Assess the risk related to global • Implement measures to • Implement measures for megatrends compared with a “license curb risk adapting to and curbing risk to operate” Anti-corruption Continue communication about taking a clear • Further develop routines and tools for • Further develop and • Further develop and position against corruption in all forms. risk assessment, and the approval and maintain: maintain: follow up of business partners. • Communications internally • Communications internally and externally about and externally about our Further develop and maintain in-house policies • Further develop internal routines for our attitude to corruption attitude to corruption and routines. investigations and follow up of • Policies and routines • Policies and routines individual cases. • Risk analyses • Risk analyses Carry out risk analyses, internal controls and • Revise and distribute e-training • Action plans • Action plans audits to confirm compliance with legislation, programmes for ethics and compliance • Reporting • Reporting regulations and internal routines. Implement risk for all employees. • Training • Training reduction measures as needed. • Collaboration with external • Collaboration with external parties parties Further develop and carry out continuous training • Implement training programmes for • External evaluation of new employees, new line supervisors, compliance and the anti-­ management and susceptible sales corruption programme. staff in marketing, procurements, etc.

Further develop good forms of cooperation with business partners and other external parties. Routines for sustainability and corporate social responsibility Draw up and implement routines in connection • Draw up and implement routines • Implement routines for • Maintain, evaluate and with venture creation, new buildings and product for establishing ventures in new sustainable product develop- further develop routines for development. geographical areas and routines for ment sustainability and CSR erecting new buildings Human rights and labour rights Implement routines for analysis, control and the • Implement due diligence for all larger • Maintain, evaluate and • Maintain, evaluate and reporting of possible abuses of human rights units and overall Corporate risk further develop routines further develop the routines – implement necessary due – implement necessary due diligence diligence Suppliers Implement routines and processes for follow • Implement routines and processes for • Maintain, evaluate and • Maintain, evaluate and up of suppliers relative to sustainability and CSR all units in the Group further develop routines, further develop routines, • Follow up of the action plans that have processes and engimplemen- processes and been drawn up for each business area tation implementation Climate and environmental strategy Draw up a new climate and environmental • Draw up a new climate and • Follow up initiatives and • Follow up initiatives and strategy environmental strategy activities described in the activities described in the climate and environmental climate and environmental strategy strategy

Climate and environmental accounts • Better quality data reported on the climate and the environmental accounts Stakeholder dialogue Implement systematic dialogues with • Assess the new approach – draw up • Implement in accordance • Implement in accordance stake­holders related to sustainability and CSR a strategy-policy for dialogue with the strategy-policy with the strategy-policy

KONGSBERG • Annual Report and Sustainability Report 2014 139 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

KEY SUSTAINABILITY FIGURES

Financial value added

MNOK 2014 2013 2012 2011 2010 2009 2008

Added value Payroll expenses 4 537 4 304 3 894 3 515 3 172 3 003 2 561 Share dividend 1 110 630 450 450 450 240 165 Interest to lenders 30 43 37 35 41 115 93 Retained earnings (230) 595 854 980 1 050 558 422

Other key financial figures Goods and services purchased (approx.) 8 817 7 918 8 300 8 300 9 500 Government Subsidy 21 14 16 17 29

Taxes Norway 291 332 416 513 528 270 210 Rest of Europe 27 11 14 17 18 23 21 North and South America 50 55 32 24 26 19 26 Asia 37 21 43 24 25 29 17 Total 405 419 505 578 597 341 274

The Board of Directors will propose a dividend for 2014 of NOK 9.25 (5.25) per share to the AGM. The dividend consists of NOK 4.25 per share as an ordinary dividend and NOK 5.00 per share as an extraordinary dividend. Providing the proposal is adopted at the AGM on 7 May 2015, the dividends will be paid as follows if the ownership structure is the same as at 28 February 2015.

MNOK 2014 2013 2012 2011 2010 2009 2008

Dividends Norwegian State 555.0 315.0 225.0 225.0 225.0 120.0 82.5 Organisations/enterprises 191.0 111.8 90.6 97.4 97.6 56.4 40.4 Securities funds 107.1 63.7 47.1 45.2 48.4 27.6 16.9 Insurance/pension funds 59.1 34.0 25.0 25.0 24.4 12.5 9.5 Private individuals 52.8 29.2 20.9 19.9 20.2 12.0 7.3 Foreign owners 145.0 76.3 41.4 37.5 32.6 11.5 8.4 Total 1 110 630.0 450.0 450.0 450.0 240.0 165.0

Social investments

MNOK 2014 2013 2012 2011 2010 2009 2008

Financial support to organisations, etc. 8.81) 7.3 6.7 3.0 3.0 2.9 2.0

1) Including the sponsorship of three professorships at NTNU and Buskerud/Vestfold University College.

140 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Employees

2014 2013 2012 2011 2010 2009 2008

Level of education Master’s degree or more (%) 28 29 28 26 28 29 – of which, doctorates (PhD) 1 1 2 Bachelor's degree (%) 36 34 36 35 35 33 Technicians (%) 14 14 14 14 11 12 Production workers % 11 11 10 12 13 13 Other 11 11 12 12 13 13

Number of employees Number of employees, total 7 726 7 493 7 259 6 681 5 681 5 423 5 243 Number of full-time employees 7 470 7 171 7 003 6 393 5 442 5 195 5 015 Number of part-time employees 256 322 256 286 239 228 228

Age Average age 41 41 40 42 42 42 42 Employees under age 30 (%) 21 21 22 21 19 19 17 Employees between ages 30 and 50 (%) 55 56 55 55 57 55 56 Employees over age 50 (%) 24 23 23 23 24 26 27

Percentage of women Women as a % of the number of employees 20,9 21.4 21.2 20.9 19.5 18.8 19.5 Women in managerial positions as a % of total managerial positions 18 21 19 14 13 15 13 Shareholder-elected women on the Board (%) 40 40 40 40 40 40 40

Turnover Turnover (employees who have resigned) 516 587 459 424 346 250 222 Turnover (%) 6.7 7.8 6.3 6.4 6.1 4.6 4.2 – Men 5.5 5.9 5.2 4.4 4.9 3.4 3.0 – Turnover, men of the total number of men 6.9 ------– Women 1.2 1.9 1.1 2.0 1.2 1.2 1.2 – Turnover, women of the total number of women 5.8 ------

Health and safety

2014 2013 2012 2011 2010 2009 2008

Absence due to illness as a % of est. hours of work 2.6 2.5 2.4 2.2 2.5 2.6 2.4 Absence due to illness for the Norwegian companies 3.0 3.1 2.8 2.8 Number of recordable injuries per million hours (TRI) 4.7 3.7 1.5 1.7 6.3 5.5 3.5 Injury severity rate (number of days lost per one million man hours worked) (ISR) 45.3 15.6 13.6 1.1 22.3 58.2 5.6 Total number of injuries among employees 240 86 54 Total number of near-accidents among employees 140 158 78 Registered occupational diseases 0 0 0 Registered work-related fatalities 0 0 0

KONGSBERG • Annual Report and Sustainability Report 2014 141 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Climate and the environment

2014 2013 2012 2011 2010 2009 2008

CO2 emissions 2)3) CO2 emissions (thousand metric tonnes) 26 006 25 294 19 579 22 747 20 005 12 980 7 801

Energy consumption Electricity (MWh)1) 91 428 94 802 79 218 77 625 66 256 57 053 46 895 Gas/oil (MWh) 5 572 4 601 6 092 13 257 12 968 21 324 14 464 District heating (MWh)1) 16 575 20 342 20 844 20 041 23 903 1 739 1 208 Energy consumption (MWh) per employee 16.0 16.0 14.6 16.6 18.2 15 12 Energy consumption (MWh/MNOK) 7.5 7.4 7.4 7.2 6.7 5.8 5.8

Waste (metric tonnes) Waste for recycling 1 048 1 100 1 100 1 191 1 330 827 717 Residual waste 604 550 200 131 265 594 511 Hazardous risk 136 285 484 300 177 52 28

Water (m3) Water consumption (process water and sanitation water) 176 743 115 968

1) As from 2010, the reported breakdown between Kongsberg Technology park and the business areas changed so that the figures are not directly comparable with previous years. 2) Since 2010, air travel has been included in the corporate environmental accounts.

3) Most of the flights ordered by our international locations are included in the CO2 accounts for 2013, accounting for a significant share of the increase from 2012 to 2013.

Left: New eco-­ friendly 40,000 sq. ft. facility in Pocasset, Massachusetts

Right: From the energy centre for district heating, remote cooling and heat recovery at Kongsberg Technology Park.

142 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

EXTERNAL REPORTING

KONGSBERG also reports to various external organisations. We do this to ensure that the information we provide is structured, transparent and relevant in the light of international guidelines for reporting sustainability.

Global Reporting Initiative (GRI) GRI is a voluntary international framework for how companies should report on their work with corporate social responsibility and their vision and strategy for sustainable development. KONGSBERG has reported pursuant to the GRI index since 2004.

FNs Global Compact The Global Compact is the UN’s initiative for cooperating with business and industry to promote sustainable development. The initiative was taken by then UN Secretary-General Kofi Annan in 1999. The principles consist of 10 points related to human rights, labour rights, the environment and anti-corruption. KONGSBERG joined the initiative in 2006.

Carbon Disclosure Project (CDP) CDP is an international framework that encourages companies to measure and report externally on the company’s strategy in relation to climatic change and to publish the figures for the company’s emissions of greenhouse gases. KONGSBERG has reported to CDP since 2011.

GLOBAL COMPACT

Topic GC Principles Relevant GRI indicators* References 2014, page Human rights Principle 1 Support and respect the protection of internationally EC5, LA4, LA6–9; LA13–14, HR1–9, 108–109, 124, 126, 128, 133, proclaimed human rights SO5, PR1–2, PR8 138–139 Principle 2 Make sure the company is not complicit in human rights abuses HR1–9, SO5 126, 128, 133, 138–139 Labour rights Principle 3 Uphold the freedom of association and the right to LA4–5, HR1–3, HR5, SO5 108–109, 124, 126, 128–130 collective bargaining Principle 4 Uphold the elimination of all forms of forced and HR1–3, HR7, SO5 126, 128 compulsory labour Principle 5 Abolish child labour HR1–3, HR6, SO5 126, 128 Principle 6 Eliminate discrimination in respect of employment and EC7, LA2, LA13–14, HR1–4, SO5 21–22, 126, 128–130 occupation Environment Principle 7 Support a precautionary approach to environmental challenges EC2, EN18, EN26, EN30, SO5 108–109, 124, 127, 138–139 Principle 8 Undertake initiatives to promote greater environmental EN1–30, SO5, PR3–4 108–109, 124, 127, 138–139 responsibility Principle 9 Encourage the development and diffusion of environmentally EN2, EN 5–7, EN 10, EN 18, 119–122, 124, 127 friendly technologies EN 26–27, EN30, SO5 Anti-corruption Principle 10 Work against corruption in all its forms, including SO2–6 18, 108–109, 124–125, 128, extortion and bribery 132–133, 138–139

* UN Global Compact (2007), ”Making The Connection – The GRI Guidelines and the UNGC Communication on Progress”, page 15. For more information about Global Compact, see www.globalcompact.org

KONGSBERG • Annual Report and Sustainability Report 2014 143 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

GLOBAL REPORTING INITIATIVE INDEX (GRI)

On the following pages, we list the GRI indicators with references to where the topics are discussed in the report, whether they are wholly or partially answered in respect of GRI. For a complete description of the individual indicators, please see GRI’s website at www.globalreporting.org.

Deloitte has verified that our Report on Corporate Social Responsibility is generally in compliance with GRI’s reporting principles and that the reporting satisfies level B+ pursuant to the guidelines, cf. the Auditor’s Report, page 148.

NR = Not relevant NA = Not addressed PA = Partly addressed Additional indicators are marked by (*)

Indicator See Indicator See page(s) page(s) Profile 3.8 Basis for reporting on joint ventures, 106, 135-137 1 Strategy and analysis subsidiaries, leased facilities, outsourced 1.1 Statement from the most senior decision-­ 108-109 operations, and other entities that can maker of the organisation about the significantly affect comparability from period relevance of sustainability strategy to period and/or between organisations 1.2 Description of key impacts, risks, and 108-109, 3.9 Data measurement techniques and the 106, 135-137 opportunities in relation to sustainability 115, 118-122, bases of calculations 124-128 3.10 Explanation of the effect of any restate­ 106, 135-137 2 Organisational profile ments of information provided in earlier 2.1 Name of the organisation 1, 89 reports, and the reasons for such restate- 2.2 Primary brands and products 1-2, 6-7 ment 2.3 Organisation 6-7 3.11 Significant changes from previous reporting 106, 135-137 2.4 Location of organisation’s headquarters 89, 110 periods in the scope, boundary, or measure- 2.5 Number of countries where the 6-7, 110-114 ment methods applied in the report organisation operates 3.12 Table identifying the location of the Stand- 144-146 2.6 Nature of ownership and legal form 89 ard Disclosures in the report (GRI Index) 2.7 Markets served (including geographical 6-7, 110-114 Third-party verification breakdown, sectors served and types of 3.13 Policy and current practice with regard to 147 customers/beneficiaries) seeking external assurance for the report 2.8 Key numbers Cover, 1, 4 Governance, commitments, and 6-7, 9, engagement 140-142 4.1 Governance structure of the organisation, 90-99, 133 2.9 Significant changes regarding size, 106 including committees under the highest structure, or ownership governance body 2.10 Awards received in the reporting period None 4.2 Indicate whether the Chair of the highest 90-99 3 Report parameters governance body is also an executive officer Report profile 4.3 State the number of members of the 90-99 3.1 Reporting period for information provided 106 highest governance body that are inde- 3.2 Date of most recent previous report 2013 pendent and/or non-executive members 4.4 Mechanisms for shareholders and employ- 90-99, 133 3.3 Reporting cycle Annual ees to provide recommendations or 3.4 Contact point for questions regarding the 148 direction to the highest governance body report or its contents 4.5 Linkage between compensation for 66-69, Report scope and boundary members of the highest governance body, 90-99 3.5 Process for defining report content 106 senior managers, and executives and the 3.6 Boundary of the report 106 organisation’s performance 3.7 State any specific limitations on the scope 106, 124- 4.6 Processes in place for the highest 90-99 or boundary of the report 128, 135-137 governance body to ensure conflicts of interest are avoided

144 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Indicator See Indicator See page(s) page(s) 4.7 Process for determining the qualifications 90-99 EC3 Coverage of the organisation’s defined 42-46 and expertise of the members of the benefit plan obligations highest governance body for guiding the EC4 Significant financial assistance received 140 organisation’s strategy on economic, from government environmental, and social topics Market presence 4.8 Internally developed statements of mission 126-130, 132 EC5 Range of ratios of standard entry level 130 (PA) or values, codes of conduct, and principles wage compared to local minimum wage at relevant to economic, environmental, and significant locations of operation* social performance and the status of their EC6 Policy, practices, and proportion of spending 110-114, 128 implementation on locally-based suppliers at significant (PA) 4.9 Procedures of the highest governance 20-22, locations of operation* body for overseeing the organisation’s 90-99, 106, EC7 Procedures for local hiring and proportion 129 (PA) identification and management of economic, 133 of senior management hired from the environmental, and social performance local community at locations of significant 4.10 Processes for evaluating the highest 90-99 operation governance body’s own performance, Indirect economic impacts particularly with respect to economic, EC8 Development and impact of infrastructure NA environmental, and social performance investments and services provided primarily Commitments to external initiatives for public benefit through commercial, 4.11 Explanation of whether and how the 124, 127 in-kind, or pro bono engagement precautionary approach or principle is EC9 Understanding and describing significant 110-114, addressed by the organisation indirect economic impacts, including the 119-122, 4.12 Externally developed economic, environ- 106-107, extent of impacts* 128 (PA) mental, and social charters, principles, or 125-130, 143 Environmental performance indicators other initiatives to which the organisation Management approach 20-21, 108- subscribes or endorses 109, 124, 4.13 Memberships in associations (such as 107, 116, 125, 127, 133, industry associations) and/or national/ 143 138-139 international advocacy organizatons in Materials which the organisation: Has positions in EN1 Materials used by weight or volume NA governance bodies; Participates in projects EN2 Percentage of materials used that are NA or committees; Provides substantive recycled input materials funding beyond routine membership Energy Stakeholder engagement EN3 Direct energy consumption by primary 135, 142 4.14 List of stakeholder groups engaged by the 106-107, 115- energy source organisation 117, 128-130 EN4 Indirect energy consumption by primary 135 (PA) 4.15 List of stakeholder groups engaged by the 106-107, source organisation Basis for identification and 115-117, EN5 Energy saved due to conservation and 135 (PA) selection of stakeholders with whom to 128-130 efficiency improvements* engage (PA) EN6 Initiatives to provide energy-efficient or 121-122, 135 4.16 Approaches to stakeholder engagement, 115-119, renewable energy based products and including frequency of engagement by type 128-130, services, and reductions in energy and by stakeholder group 138 (PA) requirements as a result of these initiatives 4.17 Key topics and concerns that have been 115-117, EN7 Initiatives to reduce indirect energy 127, 138-139 raised through stakeholder engagement, 128-130 consumption and reductions achieved* (PA) and how the organisation has responded (PA) Water to those key topics and concerns, including EN8 Total water withdrawal by source 137 through its reporting EN9 Water sources significantly affected by NA Economic performance indicators withdrawal of water* Management approach 108-109, EN10 Percentage and total volume of water NA 124-125, recycled and reused* 132-134 Biodiversity Economic performance EN11 Location and size of land owned, leased, NA EC1 Direct economic value generated and 110-114, 140 managed in, or adjacent to, protected areas distribut­ed, including revenues, operating and areas of high biodiversity value outside costs, employee compensation, donations protected areas and other community investments, retained EN12 Description of significant impacts of activ- NR earnings, and payments to capital providers ities, products, and services on biodiversity and governments in protected areas and areas of high EC2 Financial implications and other risks and 119-122, 127 biodiversity value outside protected areas opportunities for the organisation’s activities EN13 Habitats protected or restored* NR due to climate change

KONGSBERG • Annual Report and Sustainability Report 2014 145 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Indicator See Indicator See page(s) page(s) EN14 Strategies, current actions, and future plans NR LA2 Total number and rate of employee turnover 141 for managing impacts on biodiversity* by age group, gender, and region EN15 Number of IUCN Red List species and NR LA3 Benefits provided to full-time employees NA national conservation list species with that are not provided to temporary or habitats in areas affected by operations, part-time employees, by major operations* by level of extinction risk* LA4 Percentage of employees covered by 130 (PA) Emissions, effluents and waste collective bargaining agreements EN16 Total direct and indirect greenhouse gas 136, 142 LA5 Minimum notice period(s) regarding opera­ NA emissions by weight tional changes, including whether it is EN17 Other relevant indirect greenhouse gas NA specified in collective agreements emissions by weight Occupational health and safety EN18 Initiatives to reduce greenhouse gas 127, 136, LA6 Percentage of total workforce represented 130 (PA) emissions and reductions achieved* 138-139 in formal joint management-worker health EN19 Emissions of ozone-depleting substances NA and safety committees that help monitor by weight and advise on occupational health and EN20 NOx, SOx, and other significant air NA safety-programs* emissions by type and weight LA7 Rates of injury, occupational diseases, lost 130, 141 EN21 Total water discharge by quality and NA days, and absenteeism, and number of destination work-related fatalities by region EN22 Total weight of waste by type and disposal 137, 142 LA8 Education, training, counseling, prevention, 129-130 method and risk-control programs in place to assist (PA) EN23 Total number and volume of significant spills 21 workforce members, their families, or com- EN24 Weight of transported, imported, exported, NA munity members regarding serious diseases or treated waste deemed hazardous under LA9 Health and safety topics covered in formal 129-130 the terms of the Basel Convention Annex I, agreements with trade unions* (PA) II, III, and VIII, and percentage of transported Training and education waste shipped internationally* LA10 Average hours of training per year per NA EN25 Identity, size, protected status, and NR employee by employee category bio­diversity value of water bodies and LA11 Programs for skills management and 129-130 related habitats significantly affected by lifelong learning that support the continued the reporting organisation’s discharges employability of employees and assist them of water and runoff* in managing career endings* Products and services LA12 Percentage of employees receiving regular NA EN26 Initiatives to mitigate environmental impacts NA performance and career development of products and services, and extent of reviews* impact mitigation Diversity and equal opportunity EN27 Percentage of products sold and their NA LA13 Composition of governance bodies and 21-22, 141 packaging materials that are reclaimed by breakdown of employees per category category according to gender, age group, minority Compliance group membership, and other indicators of EN28 Monetary value of significant fines and None diversity total number of non-monetary sanctions for registered LA14 Ratio of basic salary of men to women by NA noncompliance with None environmental employee category laws and regulations registered transport Human rights performance indicators Transport Management approach 20, 108-109, EN29 Significant environmental impacts of 136 (PA) 124, 126, transporting products and other goods 128, 133, and materials used for the organisation’s 138-139 operations, and transporting members of Investment and procurement practices the workforce* HR1 Percentage and total number of significant NA Overall investment agreements that include human EN30 Total environmental protection expenditures NA rights clauses or that have undergone and investments by type* human rights screening Labour practices and decent work HR2 Percentage of significant suppliers and 128 (PA) performance indicators contractors that have undergone screening Management approach 21-22, 108- on human rights and actions taken 109, 124, HR3 Total hours of employee training on policies 126, 128 129-130, 133 and procedures concerning aspects of (PA) Employment human rights that are relevant to LA1 Total workforce by employment type, 21, 110-114, operations, including the percentage of employment contract, and region 141 employees trained*

146 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

Indicator See Indicator See page(s) page(s) Nondiscrimination Product responsibility performance HR4 Total number of incidents of discrimination 126 indicators and actions taken Management approach 108-109, 119, Freedom of association and collective 124, 127 bargaining Customer health and safety HR5 Operations identified in which the right to 129 (PA) PR1 Life cycle stages in which health and NA exercise freedom of association and col­ safety impacts of products and services are lective bargaining may be at significant risk, assessed for improvement, and percentage and actions taken to support these rights of significant products and services Child labour categories subject to such procedures HR6 Operations identified as having significant 126 PR2 Total number of incidents of non-­ NA risk for incidents of child labor, and meas- compliance with regulations and voluntary ures taken to contribute to the elimination codes concerning health and safety impacts of child labor of products and services during their life Forced and compulsory labor cycle, by type of outcomes* HR7 Operations identified as having significant 126 Product and service labeling risk for incidents of forced or compulsory PR3 Type of product and service information NA labor, and measures to contribute to the required by procedures, and percentage elimination of forced or compulsory labor of significant products and services subject Security practices to such information requirements HR8 Percentage of security personnel trained 126 (PA) PR4 Total number of incidents of non-compli- NA in the organisation’s policies or procedures ance with regulations and voluntary codes concerning aspects of human rights that are concerning product and service information relevant to operations* and labeling, by type of outcomes* Indigenous rights PR5 Practices related to customer satisfaction, NA HR9 Total number of incidents of violations 126 including results of surveys measuring involving rights of indigenous people and customer satisfaction actions taken* Marketing communications Society performance indicators PR6 Programs for adherence to laws, standards, NA Management approach 20, 108-109, and voluntary codes related to marketing 115, 124-125, communications, including advertising, 132-133 promotion, and sponsorship Community PR7 Total number of incidents of non-compli- None SO1 Nature, scope, and effectiveness of any NA ance with regulations and voluntary codes registered programs and practices that assess and concerning marketing communications, manage the impacts of operations on including advertising, promotion, and spon- communities, including entering, operating, sorship by type of outcomes* and exiting Customer privacy Corruption PR8 Total number of substantiated complaints None SO2 Percentage and total number of business 125, 138-139 regarding breaches of customer privacy registered units analyzed for risks related to corruption and losses of customer data* SO3 Percentage of employees trained in 132, 138-139 Compliance organisation’s anti-corruption policies and PR9 Monetary value of significant fines for None procedures noncompliance with laws and regulations registered SO4 Actions taken in response to incidents 18, 109, 125, concerning the provision and use of of corruption 132 products and services Public policy SO5 Public policy positions and participation in NA public policy development and lobbying SO6 Total value of financial and in-kind NA con­tributions to political parties, politicians, and related institutions by country* Anti-competitive behavior SO7 Total number of legal actions for anticom- 132 petitive behavior, anti-trust, and monopoly practices and their outcomes* Compliance SO8 Monetary value of significant fines and 18, 125, 132 total number of non-monetary sanctions for noncompliance with laws and regulations

KONGSBERG • Annual Report and Sustainability Report 2014 147 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information

AUDITOR’S REPORT 2014

Deloitte AS Dronning Eufemias gate 14 Postboks 221 Sentrum NO-0103 Oslo Norway

Tel: +47 23 27 90 00 Fax: +47 23 27 90 01 www.deloitte.no

To the management of Kongsberg Gruppen

INDEPENDENT AUDITOR’S REPORT ON THE KONGSBERG SUSTAINABILITY REPORT 2014

We have reviewed certain information presented in the KONGSBERG Sustainability Report 2014 (“the Report”), presented on pages 104 – 148 in the KONGSBERG – Annual and Sustainability Report 2014. The Report is the responsibility of and has been approved by the management of the Company. Our responsibility is to draw a conclusion based on our review.

We have based our work on the international standard ISAE 3000 “Assurance Engagements other than Audits and Reviews of Historical Financial Information”, issued by the International Auditing and Assurance Standards Board. The objective and scope of the engagement were agreed with the management of the Company and included the subject matters on which we provide our conclusion below.

Based on an assessment of materiality and risks, our work included analytical procedures and interviews as well as a review on a sample basis of evidence supporting the subject matters. We have conducted interviews of managers responsible for sustainability aspects at corporate and at Kongsberg Maritime Strandpromenaden Horten (Norway), as well as comparing reported data with source documentation for this unit and for the reporting units Kongsberg Maritime China Jiungsu (China) and Kongsberg Gallium (Canada).

We believe that our work provides an appropriate basis for us to draw a conclusion with a limited level of assurance on the subject matters. In such an engagement, less assurance is obtained than would be the case had an audit-level engagement been performed.

Conclusions Based on our review, nothing has come to our attention causing us not to believe that:  Kongsberg Gruppen has applied procedures to collect, compile and validate sustainability information for 2014 from its reporting units to be included in the Report, as summarised on pages 106 – 107. Information presented for 2014 is consistent with data accumulated as a result of these procedures and appropriately presented in the Report.  Data reported for 2014 from the reporting units specified above, has been reported according to the procedures noted above and is consistent with source documentation presented to us.  Information about attainment of targets, as presented on page 138, appropriately reflects performance related to the objectives for 2014.  The Report fulfils the content requirements for reporting in regards to sustainability as stated in the (Norwegian) Accounting Act, § 3-3c, article one.  Kongsberg Gruppen applies a reporting practice for its sustainability reporting that is aligned with the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines (version 3.1) reporting principles and the reporting fulfils Application Level B+ according to the GRI guidelines. The GRI Index presented on pages 144 – 147 appropriately reflects where relevant information on each of the elements and performance indicators of the GRI guidelines is presented. The Company’s reporting on the UN Global Compact is consistent with the description on page 107 and the UN Global Compact table presented on page 143 appropriately reflects where relevant information on each of the UN Global Compact principles is presented in the Report.

Oslo, 20 March 2015 Deloitte AS

Eivind Skaug State Authorized Public Accountant (Norway) Frank Dahl Deloitte Sustainability

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/no/omoss for a detailed description of the Registrert i Foretaksregisteret legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Medlemmer av Den Norske Revisorforening org.nr: 980 211 282

148 KONGSBERG • Annual Report and Sustainability Report 2014 1 Introduction 8 Directors’ Report and Financial Statements 86 Corporate Governance 100 Shareholder’s information 104 Sustainability Report 149 Financial calendar and contact information Disclaimer: In the event of any discrepancy between the Norwegian and English versions of KONGSBERG’s Annual Report and Sustainability Report, the Norwegian version is the authoritative one. Sustainability Report, translation to English: Linda Sivesind,Informatic Translations. Photos: KONGSBERG, Einar Aslaksen, Forsvarets mediesenter (Simen Rudi, Torbjørn Kjosvold), Kilian Munch, Tom Reynolds, Glogerfestilvalen, Fred Jonny, Statoil (Anne-Mette Fjærli, Alan O Neill), ESA-P.Carril, GettyImages, Dreamstime (Raldi),Design: Kikkut/Bakerman. Dan Cutrona Print: RK Grafisk. FINANCIAL CALENDAR INVESTOR RELATIONS, CONTACTS

Presentation of quarterly results Jan Erik Hoff Q1 2015 – 30 April Vice President Investor Relations and Reporting Q2 2015 – 21 August Telephone: (+47) 32 28 83 30 Q3 2015 – 30 October Mobie phone: (+47) 991 11 916 E-mail: [email protected] Annual General Meeting – 7 May Tor Egil Kili Ticker kode: KOG (Oslo Stock Exchange) Manager Investor Relations Telephone: (+47) 32 28 90 29 Mobile phone: (+47) 982 14 019 E-mail: [email protected]

ADDRESSES

The Group is headquartered in Kongsberg, Norway

Kongsberg Gruppen ASA Kongsberg Maritime AS Kongsberg Defence Systems Street address Street address Street address Kirkegårdsveien 45 Kirkegårdsveien 45 Kirkegårdsveien 45 NO-3616 Kongsberg NO-3616 Kongsberg NO-3616 Kongsberg

Mailing address Mailing address Mailing address P.O. Box 1000 P.O. Box 483 P.O. Box 1003 NO-3601 Kongsberg, Norway NO-3601 Kongsberg, Norway NO-3601 Kongsberg, Norway Telephone: (+47) 32 28 82 00 Telephone: (+47) 32 28 50 00 Telephone: (+47) 32 28 82 00 Telefax: (+47) 32 28 82 01 Telefax: (+47) 32 28 50 10 Telefax: (+47) 32 28 86 20 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Org. no. 943 753 709 Kongsberg Protech Systems Kongsberg Oil & Gas Technologies www.kongsberg.com Street address Street address Kirkegårdsveien 45 Drengsrudbekken 12 NO-3616 Kongsberg NO-1383 Asker

Mailing address Mailing address P.O. Box 1003 P.O. Box 451 NO-3601 Kongsberg, Norway NO-1373 Asker, Norway Telephone: (+47) 32 28 82 00 Telephone: (+47) 67 80 48 00 Telefax: (+47) 32 28 86 20 Telefax: (+47) 67 80 48 30 E-mail: [email protected] E-mail: [email protected]

SUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY, CONTACT

Nils Molin Group Vice President Sustainability & CSR Telephone: (+47) 32 28 64 01 Mobile phone: (+47) 920 60 113 E-mail: [email protected]

KONGSBERG • Annual Report and Sustainability Report 2014 149 Kongsberg Gruppen ASA Kirkegårdsveien 45 P.O. Box 1000 NO-3601 Kongsberg Norway Telephone: (+47) 32 28 82 00 E-mail: [email protected] www.kongsberg.com

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